Introduction to savings accounts

Any introduction to savings accounts these days is going to make quite sombre and gloomy reading. This reason for this can be pinned quite squarely on the recent drastic reductions in the Bank of England base rate, which has plunged to its lowest ever. And it is that rate, of course, which determines the interest rate not only paid by borrowers, but also that received by savers. The current rate might be potentially good news for borrowers, therefore, but it is far less so for savers.

Figures released by the Bank of England and published in the Guardian newspaper on the 12th of January 2009, for example, revealed that the rates of interest currently available on most forms of saving account is less than 1%.

With the base rate at an all-time low of 1.5%, of course, such poor returns on savings accounts has to be expected. Nevertheless, the overall shortage of funds available for lending counts to the savers’ advantage because it means that banks and building societies are practically desperate for cash deposits. Although it might not seem like it, therefore, there remains quite keen competition amongst such deposit-takers for savers’ funds.

Not only are banks and building societies keen to attract cash savings, they are especially eager to attract longer-term rather than short-term deposits. The rates of interest offered on notice accounts – where advance notice of an intended withdrawal of anything between 30 and 90 days is required – remain slightly higher than the rates offered on instant access savings accounts. If you are able to tie your money up for at least as long as the period of notice allows, therefore, it should be possible to secure a better rate of interest on your savings. Nevertheless, the low rate of the underlying interest rate is eroding the wide differences between rates offered on notice, compared to instant access, savings accounts that would have been apparent a year ago, for example.

Slightly higher interest rates again should still be available if you are in a position to tie up your savings for a still longer period of time in a savings bond. A bond is effectively your loan to the deposit-taker for a fixed period, at a given rate of interest, and at the end of which period, you will receive back the money you initially lent, plus any interest earned on the loan. Once the bond has been purchased, therefore, there is generally no provision for you to gain access to those savings by redeeming the bond early and it will be necessary to wait until the agreed maturity of the bond. Because the deposit-taker has your money for longer and the more or less certain knowledge that you will not be able to reclaim it before the maturity date of the bond, this form of saving generally represents the highest rate of interest available.

The net value of any savings, however, also need to take into account any income tax that has to be paid on the earnings and no introduction to savings accounts would be complete without reference to the Individual Savings Account, or ISA. This represents a way of enjoying tax free income from savings up to the maximum permitted in an ISA of £3,600. The tax-free incentive, moreover, has the potential for turning an otherwise unattractive rate of return on your savings into one that is at least inflation-proof.