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Top-rate savings you can bank on By Sam Barrett
Whether you're planning your retirement or putting some money aside for a holiday, the guaranteed growth that savings offer means they are the foundation of any financial planning. But this foundation was shaken in September by The reason behind its turn to the Bank of England was an increase in the interest rate at which banks lend to one another (the London Inter-bank Offered Rate, or Libor). Fears about rising interest rates and increased defaults had fuelled a credit crunch, forcing the rate up to a nine-year high of almost 6.8% - above the Bank of England rate of 6.75%. Although Northern Rock claimed it had taken this action because of extreme conditions in the financial markets, and the Treasury and Financial Services Authority (FSA) said it was solvent, this wasn't enough to stop a run on the bank. Around £2 billion was withdrawn from the bank's coffers, with savers queuing for days to withdraw their money. However, protection was always in place: under the terms of the Financial Services Compensation Scheme (FSCS), savers were guaranteed the return of the first £2,000 of their deposit, plus 90% of the next £33,000. In response to the panic, the Treasury boosted this scheme, guaranteeing 100% of any deposits with Northern Rock. Meanwhile, at the beginning of October, the Government further enhanced the deposit protection scheme to guarantee the return of the first £35,000 - with a possibility that the limit could be increased to £100,000 in coming months. So there's no need to keep your money under the bed. But if you want increased security, Anna Bowes recommends checking that your bank is registered with the FSA. And remember the £35,000 compensation limit when allocating your savings. "Put no more than £35,000 into each account," advises Colin Jackson, director of Baronworth Investment Services. "If you have more than £35,000, you'll need to save with more than one bank or building society." A gulf between good and bad While holding savings remains a low-risk pursuit, there's a big difference between the best and worst accounts. Patrick Connolly, certified financial planner with Towry Law, says: "There are four factors to consider when picking a home for your savings: the rate; the security of the organisation; the flexibility of the account - for example, how you access it; and the tax position." If security is an important factor for you, National Savings & Investments offers the greatest reassurance as it is backed by the Government, but the rates can be lower. However, the tax treatment of some of its products make them particularly attractive for higher-rate taxpayers. Anna Bowes likes its index-linked savings certificates. These are tax-free and the current issue (15th) pays inflation plus 1.35% for an investment of between £100 and £15,000 over a term of three or five years. "With inflation at 4.1%, this equates to an interest rate of 6.8% for a basic-rate taxpayer or 9.08% for a higher-rate one. Although your money's tied up, you'd be hard pushed to get this on a taxed product." Another tax-free product is a cash ISA (individual savings account). Unless you intend to use your ISA allowance for your equity investments, you should save into one of these first. You can invest up to £3,000 this year, but the annual allowance increases to £3,600 from April 2008. "The best rates come out at the end of the tax year to attract business, but you can still get decent rates now, including 6.3% from National Savings & Investments," adds Andrew Hagger, head of news and press at Moneyfacts. Next stop: Standard savings Once you've used up your ISA allowances, a standard savings account should be the next home for your money. When choosing the right one for you, think about how you want to use it. First and foremost, consider how you want to run your account. As well as branch-based savings accounts, it's common to have telephone, postal and internet-only accounts. Saving online can mean a higher rate. For example, Bradford & Bingley has the top rate for online savings accounts, with 6.40% gross on its Internet Saver. But its highest paying branch account, the What If? Saver, pays 5.75% gross including a 0.5% bonus and several restrictions on access. And you'll get just 2.15% on £500 in its Everyday Saver account. Also, think about whether you want a notice account or an instant access one, as you may be able to get a slightly higher interest rate if you're happy to tie your money up. According to Moneyfacts, the highest rate for a £1 deposit in a no-notice account is Anglo Irish at 6.1% gross. Slap on an 80-day notice period and you'll get 6.4% gross in the Chelsea Building Society's Double Guarantee 2nd Issue. Some of the bonds where you have to tie your money up for a year or more further enhance your interest. The best rate - from Anglo Irish Bank - is 7.5% for a deposit of at least £500 over a year. Your age can also bump up your interest rate, with some banks and building societies offering higher rates to the over-50s and 60s. Top of these accounts, according to Moneyfacts, is the 50 Plus eSave from Coventry Building Society. This pays 6.4% gross on investments from £1. Other institutions that cater specifically for the more mature saver are Saga and both the Market Harborough and Loughborough building societies. But don't assume that because an account is targeted at 'silver savers' it will be the best deal across the market; it may just be the best deal at that particular bank. Age is no barrier Whatever your age, there are still a number of headline-grabbing high interest rate accounts for regular savers. Topping the charts is HSBC, with 8% gross on deposits of between £25 and £250 paid in each month over a year; Leek United Building Society, with 7.5% on deposits between £10 and £250 a month; and Abbey, with 7.25% (7.23% AER) on monthly deposits of £20 to £250. "These accounts are worthwhile - if you understand the limitations," says Anna Bowes. "Most only allow you to pay in for 12 months, so you only get the full rate on a small part of your savings. And you won't be able to miss a payment or make any withdrawals. Make sure you take the money out at the end of the savings period too, as the interest rate can plunge. Some of these accounts are only available if you have a current account with the bank - an interest rate of 10% sounds great, but you'll probably pay for it on your current account." Whether you go for a regular saver or a standard instant access account, always look at the terms and conditions, as these can harbour some nasties. "Some accounts restrict the number of withdrawals you can make," says Hagger. He points to the Post Office Instant Saver account as an example. "This allows six withdrawals a year, after which you'll be charged £1 every time you take money out." Some institutions also claw back interest, if you're not careful. Kevin Mountford, head of savings and current accounts at Moneysupermarket explains: "With some accounts you might lose the interest for the month if you make a withdrawal, regardless of how much you take out. This is the case with Alliance & Leicester's Direct Saver and HSBC's Online Saver." And take care with introductory bonuses - the amount you receive can vary, both in terms of the size of the bonus and the length of time it's in place. If chopping and changing to get the best rate is too much of a chore, look out for the most consistent providers. Hagger says: "We run a quarterly survey of savings institutions to find those with the most consistently high rates over the last 18 and 36 months. The same names keep cropping up, including Anglo Irish Bank, Nationwide and Sainsbury's Bank."
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