With Consumer Price Inflation hitting 3.8 per cent and Retail Price Inflation 4.6 per cent in June, savers need to invest in the top paying accounts, just to beat the rise in prices.
But savers also need to factor in the effect of tax. Most UK savings accounts automatically deduct 20 per cent income tax (unless you are registered for gross interest) and higher rate taxpayers are liable for further 20 per cent tax on their savings.
Even though a few fixed term accounts are paying 7 per cent gross interest, Defaqto’s banking principal, David Black, warns: “Higher rate taxpayers will now have to obtain a gross rate of interest of 7.67 per cent, just to keep pace with inflation.”
National Savings & Investments’ three and five year index linked savings certificates pay 1 per cent over RPI, giving a current pay rate of 5.6 per cent.
As these are tax free products, this equates to 7 per cent for higher rate taxpayers and 9.33 per cent for basic rate taxpayers.
If you have £3,600 to spare, there are few better places to put your money at the moment than an index-linked Cash Isa. National Counties Building Society is paying RPI plus 2.6 per cent annually for three years, equating to an annualised return of 7 per cent (assuming that RPI remains at 4.6 per cent rate for the next three years), the society says.
The inflation return is measured by the change in the RPI from October 1 to September 30 2011. Before that, deposits earn interest of 6.75 per cent tax free.
Another Cash Isa worth looking at is Leeds Building Society’s Inflation Buster ISA which guarantees to pay RPI, plus 2.5 per cent. If the RPI were to average 4.3 per cent over the period of investment, this would give a tax free return of 6.8 per cent.
Elsewhere, Northern Rock’s one year fixed rate bond is paying 6.75 per cent, which while taxable, may be attractive to nervous investors because Northern Rock deposits are effectively guaranteed by the Government.
Bradford & Bingley is paying 6.51 per cent gross. Savers worried about the future of B&B should bear in mind that only the first £35,000 of savings with a financial institution (and any of its linked subsidiaries) are protected in the event of a bank going bust.
Meanwhile, there are a number of taxable accounts which top the best buy tables, but only because they include bonuses which last typically for one year. These are fine providing you are prepared to switch accounts when the bonus expires.
For instance, Derbyshire Building Society’s online account is paying 6.55 per cent, but with a bonus of 1 per cent for the first year.
Another example is Alliance & Leicester’s Premier Direct Current Account, currently paying 8.19 per cent gross for the first year, after which it falls to base rate less 1 per cent (or 4 per cent if base rate is 5 per cent in a year’s time). The 8.19 rate is only available if you deposit at least £500 a month.
If you prefer a branch-based account, Abbey’s Instant Access Saver 2 provides a rate of 6.39 per cent, including a 1 per cent bonus for 12 months.
For more information, visit Defaqto’s best buy tables:
http://www.defaqto.com/consumer/savings-accounts/cash-isas.aspx
http://www.defaqto.com/consumer/savings-accounts/regular-savings-accounts.aspx
http://www.defaqto.com/consumer/savings-accounts/instant-access-accounts.aspx
http://www.defaqto.com/consumer/savings-accounts/term-accounts.aspx
http://www.defaqto.com/consumer/savings-accounts/notice-savings-accounts.aspx
