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The Best Home for Your Savings



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 CPI inflation rose to 3.5% in January. That means most savers are currently losing money after inflation. The low Bank of England base rate – 0.5% – combined with the high inflation rate mean basic-rate taxpayers need to earn interest of at least 4.38% on their savings in order to see a real return. Meanwhile, higher-rate taxpayers need a rate of 5.83% or more. This article first appeared in Money Week.

It's a shame there are no savings accounts offering interest rates above 5.25%, says Lorna Bourke in CityWire. So higher-rate taxpayers can't make a real return on their savings. Basic-rate taxpayers could opt for the State Bank of India's Hi Return Account – it pays 5.25%. But you have to lock up your funds for five years, not ideal given interest rates are likely to rise over that term. A shorter option is Halifax's internet-only four-year Websaver fixed-rate account, paying 4.5%. But even four years is a long time to lock your money up. Those with less than £2,500 in savings should go for Alliance & Leicester or Santander's current accounts. Both pay 6% for the first year.

All in all, "the best use of money for anyone with cash who might need it in a hurry has to be an offset mortgage", says Bourke. With an offset mortgage a savings account is attached to your mortgage and any money deposited in the account is taken off the amount of home loan before interest is calculated. So if you have a £250,000 mortgage, and £50,000 in an offset savings account, you pay interest on the difference of £200,000.

With the best rates possible on fixed-rate bonds sitting around 5%, a basic-rate taxpayer would have to be paying less than 4% interest on their mortgage to justify investing rather than offsetting. Meanwhile, a higher-rate taxpayer would need to be paying less than 3%. Best of all, "you can get at your cash savings instantly and without penalty if the investment climate changes or you need your money in a hurry", says Bourke.

This article first appeared in a recent edition of Money Week.

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