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Savers, now is not the time to lock away your cash

Interest rates will eventually have to rise to tackle rising inflation. Savers should wait and see before they tie up their money for the long-term.

Savers, now is not the time to lock away your cash

The dreadful inflation figures came as a nasty shock and are bad news for both homebuyers struggling to pay a mortgage and those on fixed incomes who are seeing their spending power being rapidly eroded (see our simple inflation guide). The Consumer Prices Index hit 3.7% in December, significantly higher than the 3.4% expected by the City.  Meanwhile the more realistic Retail Prices Index inflation — which includes mortgage interest payments — rose from 4.7% to 4.8%.

The jump in inflation has been caused by the rising costs of air travel, fuel, utility bills and food, taking the measure well above the long term target of 2%.  The governor of the Bank of England will have to decide, sooner rather than later, whether to push up Bank Base Rate to choke off inflation before it really gets a grip, or keep interest rates at 0.5% to protect the fragile recovery and risk prices moving up even further. Some experts who had predicted no increase in interest rates until the second half of the year now feel that the first upward move could come as early as May.

Homeowners should fix

An increase in interest rates will hit homebuyers with overstretched household budgets hard.  Anyone with a variable rate mortgage really must urgently consider switching to a fixed rate - if they have sufficient deposit to do so.  Swap rates, which underpin fixed rate loans and reflect what the market thinks interest rates will do in future, have been increasing for some months now and fixed rate mortgage deals are becoming more expensive. 

Savers' pitiful returns

But while the UK’s 11.5 million homebuyers are watching anxiously to see how much more they will have to pay on their home loan, savers are hoping that they will at last get a fair crack of the whip.  Rates paid to savers averaging less than 1% have been described as ‘pitiful’ by Which? the consumers’ association and now savers are facing substantial erosion of the spending power of their savings.

What is totally unfair and unjustifiable is that the banks are offering such low rates for cash on deposit whilst charging their customers average rates of 18% and more on bank overdrafts and credit card borrowing.  This margin is simply unacceptable – and even more so when you consider the massive bonuses bankers are considering paying themselves.

With inflation, as measured by the more realistic RPI, approaching 5% savers have no chance of finding any safe haven for their money that will show a real return after the effects of inflation are taken into account.   A basic rate taxpayer would need a gross return of 6% just to keep pace with RPI inflation at 4.8% and a 40% taxpayer would need to earn 8% gross to retain their spending power.  This just isn’t possible.

Five years is too long

As always the best returns are from five year fixed rate bonds.  But now is almost certainly not the time to tie up your money for a long period.  If interest rates are to rise sooner rather than later, you want to be able to switch your money into the top paying account as interest rates peak and lock in the higher rates long term at that point.

In addition, the differential between the top rate paid on five year investments – 4.75% fixed, and one year accounts at around 3% -  is not sufficient to make it worthwhile locking up your money for long periods.

The best five-year fixed-rate bond comes from Coventry Building Society which is paying 4.75% fixed until April 2016 on sums of £1 to £250,000.  You can open an account online, at a branch or by phone at  But Coventry is also offering a variable rate 30 days notice account at 3.05% which is very competitive.  The Post Office also has a good variable rate account paying 2.9% with instant access which could be even more attractive if you need to be able to withdraw funds without notice.

It makes sense to keep some cash readily available.  But if you also have lump sums to invest, the best bet might be the one-year fixed-rate bond from First Save which is paying 3.25% on sums of £1,000 up to £2 million.  There is also the option to take interest monthly for those who need income and the rate paid is 3.2%.  You can open an account at

The bank is a member of the Financial Services Compensation Scheme (, which gives 100% protection for the first £85,000 of a depositor's total deposits. Customers with joint accounts will be eligible to claim up to £170,000.

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14 comments so far. Why not have your say?

kevin clayton

Jan 20, 2011 at 13:24

What about Nationwide's 1yr tracker paying 3% for £50000+

Slightly lower for smaller sums.

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Jack Porter

Jan 20, 2011 at 13:51

We should never forget that borrowers who had their loans or mortgages befroe the crash, had made their decisions to borrow based on terms available at that time. Any reduction in their interest rates has been a large and unexpected bonus. They can have no problem with a modest uping in interest rates.

Savers need rates which at the very least allow their Capital to keep up with inflation.

The Government ignores savers. Tha banks act logically as they are aware of huge liquidity at low rates availble to them though the Bank of England. Banking profits should be restuctured by unsuring that Bnaks accept Deposits at competitive - controlled? -rates. Perhaps BofE Bonds??

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Tony Peterson

Jan 20, 2011 at 13:56


What you suggest is below inflation even before tax. Far below the inflation that is in the pipeline. Who would want such rubbish? All cash savings are toast.

Why should anyone transfer their own real wealth to Nationwide's borrowers?

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Siraj Darvesh

Jan 20, 2011 at 15:00

I would like to know why savers bother with a fix rate bank saving rate of 3 per cent when some decent blue chips offer 4-6 percent over a one year period now and historically. Plus the upside your the share price might increase (and if it decreases don't sell buy more with the dividend, especially when wrapped into an ISA

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Jan 20, 2011 at 15:39

Before April/May 2010, was BP considered a Blue Chip?

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Jan 20, 2011 at 15:47

No Chuck - that's what's called a "buying" opportunity

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Jan 20, 2011 at 16:18

The Brazil bank rate is 11.25%, so savers would get more than this. Why dont we see oportunities for UK savers to participate?

No one has picked up on the margin made by UK banks and that some of this goes to pay bogus bonuses.

If a CEO threatens to emegrate, we should ask: when was a bank last unable to fill a CEO post?

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Jan 20, 2011 at 16:43

RippedOff - you need to consider inflation rates, taxes, and the expected futures curve for exchange rates. If you could simply sell GPB at 0.5% interest and buy BRL at 11.25%, with a guaranteed 10.75% profit, every hedge fund in the world would do it.

there's no such thing as a free lunch.

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robert munro

Jan 20, 2011 at 19:47

As always it's best to use several baskets for your eggs!


If a CEO threatens to emegrate, we should ask: when was a bank last unable to fill a CEO post?


Too true, and why would we want them to stay anyway? Their performance has been worse than abysmal.

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Joseph King

Jan 20, 2011 at 20:13

First save is not open to new accounts!!

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adrian Jones

Jan 20, 2011 at 22:18

Close bros were offering 3.5% for 18 months , but no additions or withdrawals

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Tony Peterson

Jan 21, 2011 at 07:53

Posters like Kevin and Adrian irritate me profoundly. Why do they bother posting recommendations for people to save cash in accounts which steal real value from them. Haven't they grasped what inflation has done, is doing, and will continue to do to the value of cash.

The only possible way of getting a real return for your money, apart from index linked gilts which now carry hefty premia, is to bung it into high yielding shares. There may be a little risk, which can easily be minimised. But if you want a real after-tax return for money invested, shares are now the only option, as Siraj is clearly aware.

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adrian Jones

Jan 21, 2011 at 20:41

What I commented on was an observation not a recommendation,i am fully aware what effect inflation has on cash savings.Thats why most of my investments are in trusts,funds,shares,and etfs.

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Jan 22, 2011 at 12:55

Ultimately we all need some of our portfolio in cash, so the best deal(s) need to be considered?

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