It doesn’t happen often, but finally there is a bit of good news for those with large cash savings. On 31 December the Savings Deposit Guarantee in Britain was raised from £50,000 to £85,000.
That means that you can now put up to £85,000 into one account (£170,000 if it’s a joint account) and rest safe in the knowledge that if the bank goes bust, you will still – at some point – get your money back. If you have more than that sum, you will still have to deal with the administration of holding more than one savings account. Nonetheless, the shift represents a significant improvement. What it doesn’t help you out with, however, is getting a reasonable return on your savings.
With the Consumer Price Index (CPI) currently running at 3.3%, but the Bank of England base rate still sitting at 0.5%, it’s hard to find a savings account that can make you a real return after inflation and tax. Indeed, take this into account and a basic-rate taxpayer needs an interest rate of 4.2% just to break even. Pay 40% tax and it is even harder: you need 5.5%. Sadly, you aren’t going to get it. The best interest rate in the market is Coventry Building Society’s five-year fixed-rate bond, which pays only 4.75%.
That means that the best you can do is make full use of your annual individual savings account (Isa) allowance. You can shield £5,100 from tax every year in an Isa, something that brings the break-even interest rate down to 3.3% for all of us. You can get that from Northern Rock’s Fixed Rate Isa Issue 151, which pays 3.5% if you are prepared to lock your money up for three years.
Just like the offering from Coventry, it comes with risk. Why? Because both inflation and interest rates may well rise in the next few years, leaving you locked into a sub-standard rate that no longer beats the rising cost of living. You can get out of both deals – the former in exchange for 120 days of interest and the latter for six months’ worth.
These are hefty penalties, but if you know you aren’t going to move your money every six months to keep up with possibly rising interest rates it might be a risk worth taking.
If you would rather switch without penalty whenever a better interest rate becomes available, you need an instant access account. The best instant access Isa interest rate comes from Santander’s Flexible Isa at 2.85%. And the best non-Isa rate comes from the Post Office’s Online Saver, with a rate of 2.90% for the first year.