09:29 17 May 2013
If you are holding out for savings rates to rise before deciding where to put your cash, you could be in for a long wait.
The recently-announced extension to the government's Funding for Lending scheme means that banks and building societies won't need your cash any time soon, so saving rates are unlikely to improve in the short-term.
We look at why NOW is the time to take action with your savings - and some of the best available deals.
Why won't savings rates move upwards soon?
Savers have been hit hard by the government's Funding for Lending scheme which was introduced last summer. This provides banks and building societies with cheap funds to lend with, which has resulted in plummeting mortgage rates.
However, the scheme has been less beneficial for savers, as it has meant banks no longer need to battle to attract their cash, so savings rates have fallen dramatically. Now that the scheme has been extended so that it will last until 2015 rather than 2014, this means we're unlikely to see rates improve for at least the next couple of years.
Is there any point saving then?
Yes - firstly, regardless of the rate, it's important to have some cash stashed away as a security. Experts recommend at least three months' income. And, even though savings rates may be low, it is still possible to earn decent returns if you know where to look. You'll need to be vigilant though, and prepared to move your money regularly, as often the best returns are often found on accounts which include a short-term bonus in the rate.
Where can I find the best returns?
Cash individual savings accounts (ISAs) should be top of your savings priority list, as returns from these accounts are free of income and capital gains tax. This year you can invest up to £5,760 into a cash ISA.
Nationwide Building Society's Flexclusive ISA Issue 3, for example, pays an annual equivalent rate (AER) of 2.50% tax-free on a minimum investment of £1 and can be operated both online and in branches. However, you must hold a FlexAccount with Nationwide to open this account, and the rate includes a bonus of 1.00% until the end of November next year, so you may want to move your money then. You cannot make transfers from existing ISAs into this account.
If you don't want to have to open a current account with Nationwide, the building society also offers the Easy Saver ISA, which pays 2.25% AER on a minimum investment of £1. The rate includes a 1.75% bonus until the end of October next year, so again you may want to move your money when this goes.
Other competitive variable rate ISAs include Cheshire Building Society's ISA Saver Issue 3 account, which pays 2.30% AER on a minimum investment of £1,000. The rate includes a 1.80% bonus until the end of October 2014. Although this account can only be operated by post, you can apply online or by telephone. The Cheshire ISA does accept transfers from ISAs opened in previous tax years.
If you are prepared to tie up your savings for a few years, then fixed rate cash ISAs pay even higher rates of interest. Virgin Money's Fixed Rate Cash E-ISA 5 Years, for example, pays 3.00% AER tax-free on a minimum investment of £1, and allows transfers from previous ISAs. However, you must be certain you can afford to leave your cash untouched for the full five year term, as there are penalties if you want to make a withdrawal.
What about easy access accounts?
Easy access accounts are among those which have been hardest hit by the Funding for Lending scheme. Whereas it used to be possible to earn 3% or more in easy access accounts not so long ago, the top rate currently available is1.80% AER from the West Brom's Branch Easy Access Saver 3 and WeBSave Plus 3accounts, which can both be opened with a minimum investment of £1,000.
You can only make two withdrawals a year from the Branch Easy Access Saver 3 account. If you make any more than this, you will lose 60 days' interest on the amount withdrawn. The WeBSave Plus 3 account is more restrictive - if you make more than one withdrawal, you will lose 90 days' interest on the amount withdrawn.
If you think you will need regular access to your cash, then Derbyshire Building Society's NetSaver Issue 11 account is likely to be a better bet. This pays 1.70% AER, and the rate includes a 1.2% bonus until the end of June next year, so you may want to move your money then. The account can be opened with a minimum investment of £1,000 and you can make as many withdrawals as you want.
What are the options for longer term savings?
If you are happy to lock up your cash for a year or more, and have already used this year's cash ISA allowance, then a fixed rate bond may be worth considering. Remember, however, that you won't usually be allowed access to your savings during the fixed rate term.
If you have £500 up to £200,000 to invest, then Bank of Baroda's MAX 1 Year Fixed Rate bond, which is exclusive to MoneySupermarket, pays 1.90% AER fixed for a year.
For savers with at least £2,000 to invest, United Bank's 1 Year Fixed Term Deposit account pays a higher rate of 2.00% AER.
Savers who are prepared to tie their money up for longer will earn higher returns, but bear in mind that while a rate might look competitive now, it may not necessarily still appeal in a few years' time when interest rates do eventually start to rise.
Vanquis Bank's High Yield 5 Year Bond pays 2.56% AER on a minimum investment of £1,000, whilst Issue 55 ofVirgin's 5 Year Fixed Rate bond pays 3.00% AER on a minimum investment of £1.
Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.
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