The top ISAs and bonds for hard-pressed savers

Inflation is eating into savers’ funds and even if you are investing in a tax free ISA you will need an account paying at least 3.21% to earn a real return against inflation.  This is difficult to find.  Interest on the average easy access ISA has fallen from 1.44% in April 2010 to 1.38% today.

The top relatively easy access ISA is from Newcastle Building society which currently offers an interest rate of 2.75% tax free with 120 days notice for withdrawals.  You can open an account at a branch, by post or telephone but not on line.  Minimum investment is £500.  For those who prefer to manage their money online Nationwide is offering an ISA paying 2.71% on sums of £1 or more and you can make instant withdrawals.

It is essential to keep an eye on your savings as many accounts pay a first year bonus to boost the headline rate, reverting to around 1% or 2% at the end of the year.  There are 17.5 million ISA savers with £143 billion invested in cash ISAs according to figures from the Office of Fair Trading – so there is a lot at stake.   

Transfers from other ISAs

Not all ISA providers will accept transfers from other deposit takers but Birmingham Midshires accepts transfers and is paying 4.25% fixed on a five year ISA bond on sums of £500 or more and you can open an account by post.  If you don’t want to tie up your money for such a long period Northern Rock has a four year bond paying 4.2% fixed on £500 or more while Nationwide, Dunfermline and Derbyshire building societies are all paying 4.15% for four year money.

A compromise for those who want a good rate but might need access to their money are the new Leeds Building Society fixed rate ISA products, which includes 1, 2, 3 and 5 year versions paying 2.25%, 2.6%, 3% and 3.75% respectively.  All the products offer access to 25% of the funds, without notice or penalty, at any time.  

But a better deal is available from Northern Rock and the Post Office which are both currently paying 3% on sums of £500 or more on a one year bond.  This leaves you free to transfer to a better rate after a year if interest rates start to go up.  But these accounts do not accept transfers from other providers so it is only for new money. You can open an account at either at a branch, by post of with the Post Office by phone also.  Neither offers an internet facility.

For those who need access to their money the AA has launched a new instant-access Cash ISA offering a variable rate of 2.70% including a 1% bonus for the first 12 months.  Called the AA Access ISA, the minimum deposit for this postal account is £500 and it offers unlimited access to funds with no notice of withdrawal.  Investors can choose annual or monthly interest payments.  The account accepts transfers from other providers.  The rate is only marginally lower than the 2.75% on offer from Newcastle Building Society and you don’t have to give 120 days’ notice.

Fixed rate bonds

Savers are being squeezed across the board, not just on ISAs.

For a one year investment, ICICI Bank is paying the best fixed rate at 3.1% for sums of £1,000 or more and you can open an account online.  For two year bonds the top payer is Santander at 3.75% fixed – but there is a high minimum of £25,000.  For those with more modest savings of £500 or more, the Post Office is paying 3.7% fixed on two year bonds and you can open an account online whereas Santander wants you to go into a branch to apply. 

At three years the chart topper is ICICI Bank again paying 4.15% on sums of £1,000 or more and for four year fixed rate bonds the top payer is Aldermore paying 4.25% with ICICI paying the best rate for five year money at 4.75%. 

Yorkshire Building Society has just launched a new range of very competitive fixed rate bonds paying 3.56% gross over two years, 4.1% for three year money and 4.6% for a five year investment.  All three products have a minimum opening balance of just £100 and there is a monthly interest option for those who rely on their savings for income. 

Along with its flexible ISA, Leeds Building Society has also launched a five year fixed rate bond paying 3.5% with unlimited access to 50% of the funds without penalty. However, if you have large sums to invest you will probably do better to put most of your money into the ICICI Bank, or Yorkshire Building Society’s five year fixed rate bond, both of which pay a higher rate, and just keep an emergency fund available in an instant access savings account. But the Leeds bond does have the advantage of offering a monthly interest option. 

The best instant access account is offered by West Bromwich Building Society which is paying 2.65% gross on sums of £1,000 or more if you open an account at a branch, or 2.6% if you apply by post or telephone.  For those with smaller sums of £1 and upwards the best buy comes from National Savings & Investments with its NSI Direct Saver account paying 2%.