MONEY COMMENT
Seeking Out The Best Savings Rates

By Cliff D'Arcy
September 4, 2003

It's a hard life being a saver in Britain these days. Mortgage borrowers are reaping the benefit of the lowest interest rates for almost fifty years, while savers continue to suffer. Low interest rates usually hit the elderly hardest, as many rely on interest from savings to boost their retirement income. Just over ten years ago, it was possible to earn 10% gross from the best deposit accounts, but those days are long gone.

What's really frustrating is, following a string of base-rate cuts, it's becoming impossible to earn a real return on savings, after accounting for tax and inflation. The latest 0.25% cut was announced on 10 July, and almost all savings institutions quickly responded by lowering their savings rates. Coventry BS and Scottish Widows Bank were notable exceptions: both raised rates fractionally on their star accounts.

Here's a demonstration of how difficult it is to make money from your pot of cash:

Gross annual interest rate: 3.5% (that's equal to the base rate)
Deduct tax at 40%:          1.4% (for a higher rate taxpayer)
Net interest rate:          2.1%
Deduct inflation:           2.9% (RPIX for June, the RPI excluding mortgages)
Net real return:           -0.8%

In fact, higher-rate taxpayers need to earn over 4.83% to see any real return on their savings, which is a tall order. For basic-rate taxpayers, who pay 20% tax, this break-even figure is 3.63%, which is exceeded only by the highest-paying accounts. Speaking of Best Buys, here are several from the hot-off-the-press September issue of Moneyfacts magazine (based on a balance of £500 in an instant access, no-notice or Internet account):

Company          Account name         Rate
ING Direct (UK)  Savings              4.1% (cut from 4.3% on Sept 1)
Coventry BS      NetSave Instant III  4% (comes with cashcard and rate guarantee)
Halifax          Web Saver            4%
Citibank         Saver                3.85%
Northern Rock    Online Tracker       3.75% + 0.4% bonus for 6 months (wef 06/09/03)
Abbey National   eSaver               3.5% + 0.5% bonus for 6 months

So, round up your cash and stick it in one of these accounts, because you'd be hard pushed to find better deals elsewhere. You can apply for the ING, Coventry and Citibank accounts via our Savings Centre.

Alternatively, if you don't like paying tax on your savings interest, you can invest up to £3,000 a year in a tax-free savings account called a cash mini-ISA. Read more here; this is one of the Best Buys.

Even after you've gathered up your money and transferred it to a Best Buy account, you need to remain vigilant. Savings providers are constantly withdrawing some accounts and launching others in a bid to win new customers. DON'T get caught up in one of these dormant accounts, because sneaky companies quietly cut rates to the bone on discontinued products, as this story demonstrates too well!

More: Visit our Savings centre and find out more about Cash mini-ISAs.