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High Street Savings Accounts: Are They Still Worth It?

By: Kevin Dowling BA (IMC) - Updated: 27 Aug 2012 | comments*Discuss
Bank High Street Savings Account England

The Bank of England’s decision to cut the UK interest rate from by 4.0% down to just 1.0% may be good news for people with a tracker mortgage, however, the news is much more problematic for savers.

According to figures provided by the Bank of England, the average interest paid on a high street instant access account in January was as low as 0.51%. With inflation currently at a level of around 3.0%, this means that keeping your money in a savings account will see its value rapidly diminish over time.

Many savers are questioning whether it is worth putting their money into a savings account at all. So, with UK banks looking a precarious and pointless place to keep your money, are high street savings accounts still worth it?

Anyone with a variable rate savings account will most probably have founding that the rate on their savings has fallen just as fast as the base rate. Nonetheless, there are still some good savings account deals to be found, as long as you know the right account to choose and you are prepared to accept a few restrictions.

If your money is stuck in a low-paying account, you should be thinking about finding it a new home.

Variable Rate Accounts

Banks have been quick to lower the interest paid on their variable rate savings accounts. However, some savings accounts on the market do come with Bank of England guarantees. These means that although the rate of interest paid out mirrors, the base rate, it will not fall below a certain level, regardless of how low the base rate is set. Opting for a savings account with this sort of guarantee should offer savers some security during the next year.

Fixed Rate Accounts

If you have a fixed rate savings account you may be feeling slightly more comfortable that the rate you are receiving on your money will remain on hold, for a short while at least.

In an environment of falling interest rates, and with rates expected to stay low for some time to come, fixed rate deals look increasingly attractive and savers tend to rush to this part of the market to take advantage and ‘lock-in’ a competitive rate.

Lenders know this and respond by raising their rates or restricting the lower rates available to existing customers only.

The Benefits of Fixed-Rate Bonds

One type of savings vehicle that is still largely available to most savers is fixed rate bonds.

Many financial advisers and experts are recommending to savers that they look to purchase these bonds, which can guarantee a fixed rate of interest closer to 6.0%, providing that the money remains untouched for a set period, which is usually set at five years.

There lies the drawback of fixed rate bonds. If you need to take your money out earlier than the agreed repayment date, you will lose a fair chunk of interest as a penalty.

Instant Access Accounts

If you prefer to keep your money closer to hand, then an instant access account might be the better option. You can open most instant access accounts from as little as £1, and you will not have to pay any penalties if you decide to withdraw your money.

The downside of instant access accounts is that the most you can expect to receive in interest in today’s market is between 2.5% and 3.0%, Interest is also paid monthly, so savers won’t benefit from compound interest (where you earn money on your savings and also the interest accrued on your savings).

Regular Savings Accounts

One of the few positive aspects of the credit crunch has been the realisation that many of us need to change our spending habits and switch from being borrowers to savers.

To help with this, many banks are offering competitive rates of interest on accounts that require the customer to make regular monthly payments. Some accounts, such as from Barclays are paying as much as 6.0% annual earning rate (AER) on monthly deposits between £20 and £250.

The rate of interest is fixed, as long as you keep up your monthly payments. However, after 12 months the account will change to become a regular instant access account so you may decide to move your money to a more competitive deal at that time.

These are certainly difficult times for banks, and many are leaving their customers short-changed with the rates of return they are offering on their savings accounts.

Banks are counting on their customers to not move their money, either because they don’t know how little interest they are receiving , or they aren’t willing to go through the hassle of finding a better deal elsewhere.

The only way that banks will start raising their rates of interest will be if customers start voting with their feet and put their money elsewhere. There are some good deals still available, so it is worthwhile looking round to make sure you are getting the best rate of interest you can.

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