With the Bank of England's base rate so low, finding a rewarding home for your savings can be difficult. But there are still some good deals out there. You just need to decide how quickly you want to be able to access your account.
If you're likely to need to get at your money at the drop of a hat, then I'm afraid you will pay the price for convenience. Instant-access accounts tend to have the lowest interest rates. The best on offer at present is West Bromwich Building Society's No Notice Saver Direct, which pays 2.8%. That's a puny 2.24% after tax, or 1.68% for higher-rate taxpayers.
If you don't need instant access, but equally don't want to lock your money away for a long time, the next step up the interest-rate ladder is a notice account. These allow you reasonably easy access to your money, but you have to give them a fixed notice period before you can make a withdrawal (usually two to three months). The best account available at the moment is FirstSave's 90-Day Notice account, which pays 3.25% interest and requires you to give three months' notice.
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For the best interest rates you need to be prepared to tie up your money for a longer period of time the longer the period, the better the interest rate. For example, if you are prepared to commit to a five-year lock-up, the Yorkshire Building Society will give you 5.3% interest. That may look attractive, but remember that with interest rates at all-time lows, long-term bonds carry the risk that a year down the line your interest rate may no longer be competitive.
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One option is to take out a short-term bond of one to two years, so that if interest rates improve you aren't stuck in an uncompetitive deal for too long. But there is another way around the problem. While most fixed-rate bonds "do not allow or heavily penalise early withdrawals, some allow encashments for 90 days' loss of interest", says Steve Lodge in the Financial Times.
One such account is Birmingham Midshires five-year fixed bond, which pays 5.15%. Should you want to withdraw your money before the five years is up, you can do so with 90 days' loss of interest. Whether the penalty is worth it depends on how much you are saving and how much interest rates rise by. If you had a bond paying 5% and interest rates went up to 6%, for example, even factoring in the 90-day loss of interest a saver leaving mid-term would still have got a decent return of almost 4% in the year to encashment, says Lodge. It's similar to paying a penalty to switch mortgage deals, says David Black of Defaqto. "You've got to do the maths" and work out whether the better interest rate on the new account will cancel out the penalty. Obviously, the more savings you have, the more financially rewarding the switch will be.
