Top 20 savings accounts and cash ISAs

Savers were battered every which way in the last year, with the record low Base Rate leading providers to slash savings rates. And what was a negligible return has now turned negative thanks to spiralling inflation.

With the Consumer Prices Index (the official measure of inflation) jumping to 3.5% in January, a basic rate taxpayer currently needs to find a savings account that pays over 4.38% in interest to stop their savings pot decreasing in value after tax and inflation. A higher rate taxpayer needs to find an account that pays 5.83%.

But according to Moneyfacts the average instant-access savings account fell to just 0.73% in January, and there are currently no fixed rate bonds paying enough to help a higher rate tax payer break even.

Gulp!

In other words, savers are seeing their pots being eroded before their very eyes. Hopefully the current hike in inflation will be temporary, as predicted by the Bank of England, which thinks it will fall back under 2% later this year. That will ease the savings gap a bit, but interest rates are still low.

What can you do about it?

It’s tempting to sacrifice saving and go on a spending spree, or at least pay a chunk off your mortgage if you have one. You should certainly pay off any other debts like credit cards and overdrafts ahead of savings.

But the problem with overpaying your mortgage is that, aside from the most flexible accounts, it can be hard to get that money back, or at least to access it quickly. And many of us like to know we can get our hands on our savings instantly should we need to.

The only option for many is to really maximise the money we have in savings, ensuring we get the best possible return rather than languishing on an average deal.

Where to start?

It’s that time of year when you can’t get away from ISAs so let’s begin there. These tax-free savings accounts really make sense in the current market as you effectively get an extra 20% on the interest rate (or 40% if a higher rate taxpayer).

The cash ISA limit for this tax year (2009-2010) is £3,600 for everyone under 50 and it rises to £5,100 for the next tax year from 6th April (2010-2011).

A massive 92% of cash ISAs accept transfers in, says Moneyfacts, so if you are languishing on a dud deal it is time to find a better ISA now.

If you don’t need to transfer any existing ISAs, you can’t do much better than the Flexible ISA launched this week by Santander and sister provider Alliance & Leicester.

The best ISA in town!

The new Santander easy access ISA has snatched the best buy spot by some margin.

Its Flexible ISA pays a guaranteed minimum 3.5% for the first year and it also guarantees to pay at least 3% above Base Rate for this first 12 months, so you’re covered if rates rise.

A basic rate taxpayer would have to find an instant-access account paying at least 4.37% to equal the 3.5% return -- and frankly you won’t find anything like that!

You also get instant access to your money without penalty, making this a real crowd-pleaser. It’s been widely labelled the best buy ISA and it won’t hang around for long. I applied for it myself on Thursday!

You should note it doesn’t accept existing ISA transfers in (but Santander offers a 2.75% Direct ISA that does).

Compare cash ISAs now >>

Here’s the best of the cash ISAs:

Standard savings

What if you have used up your ISA allowance and you still have money to save? It’s important you find a good home for this cash too. But where? 

At least eight best buy accounts have been pulled in the past two months with the average top rates plummeting.

Even so, a best buy savings deal is still better than a poor rate so it is vital you switch your money to make every pound of your cash work as hard as possible for you.

Compare the best savings accounts with lovemoney.com, but also remember to check with your existing bank in case it offers exclusive deals to current account customers, as many do.

Below are the best buy instant-access savings accounts, some of which include a year one bonus rate.

Note that you can get higher paying accounts that limit the number of withdrawals, such as Halifax’s Web Saver Extra which pays 2.8% and allows one penalty-free withdrawal a year. This is not completely instant access so not in the table, but it does offer some flexibility to withdraw.

Fix it

Instant-access savings are really useful for most of us, but if you have extra money that you can afford to tie up for longer you can earn more interest by fixing your rate.

At the moment the longer you can tie up your cash the higher the interest achievable, but remember rates could rise in the next couple of years so you might not want to lock in for too long.

In the ISA sector there’s some tempting fixed rate savings on offer, as shown below:

And non-ISAable fixed rates are also worth taking a look at. The best are below:

Use lovemoney.com’s resources

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Watch this video: The top new easy access savings account