Bank of Baroda tops the savings charts

While interest rates at 8% - as predicted by Andrew Lilico - would be disastrous for many homebuyers, it would be welcomed by savers who have had a rough time over the past 15 months or more.  If you want to keep your powder dry to take advantage if interest rates move up and leave yourself maximum flexibility while getting the best rate possible, go for an instant access account or a one-year fixed rate bond.

The best instant access accounts generally have an introductory bonus like the new Online Saver Account from the Post Office which is paying 2.75% with no restrictions on withdrawal.  If rates do rise you will be free to take advantage of a better return.  But 1.25% of the 2.75% return is a guaranteed 12 month bonus so keep an eye on your savings and don’t forget to shop around for a better rate when the first year is up. The minimum investment is only £1.  Full details at www.postoffice.co.uk.

Santander’s ESaver Issue 2 also pays 2.75% which includes a first year bonus of 2.25%.  Even better is the Ing Direct Saver account.  It pays the same rate of 2.75% on sums of £1 and upwards but the rate is guaranteed for the first year and there are no penalties on withdrawals.  Full details at www.ingdirect.co.uk or www.santander.co.uk. 

The best one-year fixed rate bond comes from Bank of Baroda (www.bankofbarodauk.com) which is paying 3.15% on sums of £500 or more. Bank of Baroda is authorised and regulated by the Financial Services Authority and is a member of the Financial Services Compensation Scheme which means your deposits are protected up to £50,000 per person. You have to decide whether it is worth tying up your money and losing the flexibility of an instant access account in return for 0.4% more.   Close behind is ICICI Bank paying 3.1% on sums of £1,000 or more on its HiSave bonds.  This is an internet only account (full details at www.hisave.co.uk). 

Bank of Baroda also tops the charts for two-year fixed rate bonds paying 3.8% compared with rival Aldermore Bank (www.aldermore.co.uk) which is paying 3.75% on sums of £1,000 or more on its online account.  Nottingham Building Society (www.thenottingham.com) is launching a new two-year fixed rate bond also paying 3.75% with a minimum investment of £1,000.  The account can only be opened and operated by post however.

Smaller savers can earn 3.7% on sums of just £1 on a two-year fixed rate bond with the Coventry Building Society.  The account has the advantage of offering a monthly income option – very useful for those who use interest payments to supplement income.  Full details at www.thecoventry.co.uk.

Rates jump quite sharply between two and three year bonds and if you are prepared to tie up your money for another year, Bank of Baroda is paying 4.3% on sums of £500 or more on three-year fixed rate bonds.  This is substantially higher than the nearest rival Aldermore which is paying only 4.15% on three-year fixed rate bonds. 

And it is dubious whether it is worthwhile investing for four years when you earn only 4.25% fixed with Barnsley Buiding Society (www.barnsley-bs.co.uk) and Aldermore Bank on minimum investments of £100 and £1,000 respectively.  This is less than the 4.3% on Bank of Baroda’s three year product. 

For five-year fixed rate bonds Bank of Baroda again tops the tables paying 4.9% on sums of £500 and upwards.  But this is not such a good deal if you need the interest to subsidise income as interest is not paid until the bond matures five years down the line.  This is an online account.  Full details at www.bankofbarodauk.com.  If you need the interest to be paid annually both Aldermore Bank and ICICI Bank offer 4.75% on sums of £1,000 or more. 

But as long as inflation remains at 4.8% (RPI) none of these accounts are showing a return ahead of inflation and if you are a taxpayer the returns are abysmal.  Maybe interest rates at 8% is not such a bad idea after all!