Did you know that most UK savings accounts are actually losing you money? The average savings account pays 1.3% interest but inflation, as measured by the Retail Price Index (RPI) is running at 5%. So money invested in the average savings account is not doing what you want it to do – growing in value. Instead it loses purchasing power every day.
But at least UK savers have long had one good option – NS&I savings certificates. No more. On Monday National Savings and Investments (NS&I) announced that it was withdrawing its savings certificates from sale with immediate effect. It also slashed the interest rates on a good many other products.
Why? NS&I says too much money was coming in and that it was going too far over target. That may be absolutely true, but there are suspicions that there is slightly more too it than just the volume of savings pouring into the certificates.
The withdrawal may also have been prompted by the persistent rises in UK prices: it may be that NS&I isn’t buying the Bank of England’s view that high inflation is a temporary phenomenon and is keen to cut its future payout costs.
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Otherwise, it is possible that the changes are designed to placate our high street banks, most of which are facing serious funding problems, and need all the deposits they can get. They have never been thrilled by the competition offered by the state in the form of saving certificates, and right now simply aren’t able to pay out anything like the 6% tax free some have been getting from NS&I.
Still, whatever the explanation, all this is bad news for savers. So without the NS&I’s best-buy products, where is the best place to put your money?
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Where are the best savings rates?
In order to see a real rate of growth your savings rate needs to beat inflation after tax. If it doesn’t, then in a year your money’s spending power will not be as it is now. A basic-rate taxpayer needs an interest rate of at least 6.25% and a higher rate taxpayer, a rate of 8.33% to beat RPI inflation and tax.
Even if you only attempt to beat the Consumer Price Index rate of inflation (CPI) – which is lower than RPI as it doesn’t include mortgage interest costs in its calculations – basic rate taxpayers would need a rate of 4%, and higher-rate taxpayers, 5.33%. Sadly, those interest rates just aren’t available. So wherever you save today you have to accept that you will lose out over time.
The best rate is 4.9% – from the Baroda Max five-year fixed-rate bond. But I would not recommend locking your money up for five years when interest rates are so low – they can only rise from here. A better time period would be two years: that way when interest rates go up you won’t get left too far behind. The Baroda Max two-year fixed-rate bond pays 3.8%.
If you go for a cash Isa, you need a lower rate of interest to beat inflation, as your returns aren’t being taxed. But you would still need 5% plus to beat RPI and 3.2% plus to beat CPI. Sadly you can’t get these rates either. The best cash Isas available are from Northern Rock and the Post Office which both pay 3% on their one-year bonds.
The sneaky way to beat inflation
However, all is not lost. There is one sneaky way to beat inflation – make the most of current account deals. Santander offers a rate of 5% on balances of up to £2,500 on its Preferred In-Credit Rate account.
You just have to pay £1,000 a month into the account – if you don’t, the rate drops to 0.1% – but that money can simply bounce through the account straight into another one. Add the £100 cash-back you will receive if you set up one direct debit from the account, and that easily beats inflation.
Alliance & Leicester offers the same deal, but you can’t hold an account with both banks. If you do, you’ll earn 5% interest on one account and 1% on the other. Just be aware that the rate drops to 1% after a year, so be ready to move your money.
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