What You Need to Know About High-Interest Savings Accounts

With inflation at 3.7%, your savings need to be generating a return of 4.63% a year for a basic-rate taxpayer and 6.17% a year for a higher-rate taxpayer just to keep pace. Moneyfacts’ (www.moneyfacts.co.uk) statistics show that savers who put £10,000 in an average interest-paying savings account three years ago would now have £9,516 in real terms. That’s the effect of inflation on your savings. The key is to put your money where it will at least keep its value against inflation. There are a range of choices available to you including savings accounts, combination bonds and ISAs.

Savings Accounts

Sites such as money.co.uk, moneyfacts.co.uk and moneysupermarket.com enable you to check saving accounts rates against those 4.63% and 6.17% figures.There are more than 2,000 savings products and only a handful will cover that 4.63% figure. Accounts topping best-buy charts usually do so by offering bonuses. You need to invest a set amount of money on a lump sum or regular basis and save it for a set period of time, often 12 months. You need to check the ‘small print’ to make sure you can comply with the terms and conditions of getting any bonus. Some accounts offering high-interest rates do so for only a short time. A new product will often come with a high rate to attract new investors. This rate is then reduced a few months later. The difference can be significant; 3% to 1% a year, for example. Watch to see when the rate ends so that you can move your money to a better-paying account.

Combination Bonds

Combined savings and investment products, ‘combination bonds’, can offer better returns than traditional savings accounts. You typically need to invest £5,000 or more and lock it away for five years. In return, your money will earn about 5% a year at present. Make sure you can afford to set aside your savings for five years or so. The penalties for early withdrawal can be prohibitive. Any withdrawals will usually lose you about 180 days of interest payments. Be wary of committing your savings for too long a term. When the base rate rises, high-interest saving accounts should come to market. These may make the current 5% rate look very uncompetitive..

ISAs

Savers wanting to keep up with inflation should consider ISAs. These are tax-free so your target figure needs to be the current inflation rate, 3.7%. You can check money.co.uk, moneyfacts.co.uk and moneysupermarket.com for the latest rates. Generally, there are about 20 ISAs that will cover the inflation rate. A handful will exceed it by about 0.5% a year. The minimum investment for these is usually £500. You will usually need to commit for three to five years. There are penalties for early withdrawal. Many commentators suggest the base rate will rise steadily soon. The Confederation of British Industry (CBI) recently predicted that the base rate will rise by more than two percentage points by the end of 2012. That is likely to see a similar rise in high-interest savings accounts. Bottom line? Don’t lock away your savings for too long just yet; it’s better to do it when savings rates are closer to their peak.

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