With Bank of England (BoE) base rates at historic lows, and savers earning next to nothing on their cash, we take a look at what you can expect and where the best products are to put your money.
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National Savings and Investment (NS&I) have removed their Index-Linked savings bonds. The implicit government guarantee means that NS&I must monitor inflows to ensure a competitive market. This follows the withdrawal of their Bonds and Fixed Interest Savings Certificates earlier this year for the same reasons.
Savings rates usually keep up with interest rates, however, since base rates were cut aggressively in 2008/09 we have seen the rates track inflation more closely. So where inflation goes in the next few months could significantly affect the rates we get on cash deposits.
Outlook for inflation
The BoE currently expect inflation to fall to below 2% by 2013, but have frequently underestimated inflation in the past. The government debt markets are offering interest yields of 3%, causing some to suggest that we are about to enter a period of deflation. Our view is that inflation will not be an issue in the medium term as economic growth is unlikely to be sufficient to replace that lost due to the financial crisis.
Best savings rates:
Options for savers remain limited. To achieve a real return, above the current level of Inflation at 3.1% as measured by the Consumer Price Index (CPI), savers will have to choose whether to tie their money up for longer periods. Of the products available some of the more appealing ones are listed below:
- Variable rate ISAs offer a real return. The best deal currently available is Newcastle BS Reward Saver ISA at 2.75% meaning that a lower rate taxpayers would need to earn a gross equivalent rate of 3.43% whilst higher rate taxpayers would need 4.58%.
- Fixed Rate Bonds with a 3 year period offer basic rate tax payers a real return. Currently the best offering is Aldermore BS 3 Year Fixed Rate Bond offers 4.12%, for lower rate taxpayers this is 3.30%. Higher rate tax payers will not receive a real return on even 5 year bonds.
- Variable Rate Accounts with a bonus rate attached, despite the fact that after tax interest will be below CPI, allow savers to access their money, whilst the bonus rate guarantees a minimum interest rate for the term. The highest rate is currently AA Internet Extra at 2.8% with a 12 month bonus rate of 2.65%. If you take out one of these products then make sure you look to move the money once the bonus rate expires.
Whilst the base rate remains low and bank lending continues to be at depressed levels those that require a higher level of interest from their savings to supplement their income may have to draw on their savings, sacrifice liquidity or invest their money.
For more information on savings accounts please go to our Income rates on the website. To discuss alternative options to cash please call one of our Investment Professionals on 020 7189 9999.