Scorching Savings

Lock your cash into a fixed-rate deal for a red-hot savings rateSavers have seen their interest rates slashed since last Autumn, as the Bank of England dropped the Base Rate from 5% to an historic low of 0.5%. With average instant-access savings rates of below 1%, it's difficult to get a healthy rate of return when you take tax into account, particularly for higher-rate taxpayers.Which makes it all the more important that you do not linger on your existing savings rate if your provider has cut it significantly in the last six months or so. This is no time for loyalty in the savings arena with few really standout deals available. Top-paying accountsIf a higher interest rate is your priority, you should consider a fixed rate bond, which pays a pre-determined higher rate of interest over a 12-month term. In the current market, these types of savings accounts pay the highest rate by some margin. Also, as Bank of England Governor Mervyn King recently stated that interest rates could remain low for another year, now could be a great time to lock into a high savings rate. However, the drawback with fixed rate bonds is that you need to be able to tie up your money for the whole 12 months in order to really benefit from the deal. The advertised interest is usually only payable if you do not make any withdrawals for the whole year - if you do you might lose an entire month's interest. So these accounts are only really suitable for those who do not need access to their money for the whole 12 months, for example, people who already have a surplus of savings in an instant access account.The current pick of the fixed rate savings accounts is ICICI Bank's HiSave Fixed Rate Account. Its one-year deal pays 4% while the two and three-year accounts pay 4.35%. All require a minimum investment of £1,000.Abbey's one year bond pays 3% on balances over £1 and the two-year deal pays 4.01%.If you think you might need to access your cash in the next 12 months it is probably better to search for a top-paying instant access account. The pick of these is ING Direct's savings account which pays 2.75% on balances over £1.Tax-free savingsBut even the top-paying instant access savings accounts look less attractive when you take tax into account. ING's 2.75% interest rate for example drops to 2.2% after tax and just 1.65% for 40% taxpayers. But if you haven't used up your annual ISA allowance you can save up to £3,600 a year tax-free (set to rise in the next tax year to £5,100). ING Direct and Halifax currently offer ISAs paying 3%*.Whatever type of savings account best meets your needs, don't languish on your existing deal if it isn't good enough. Switch now for a better rate.* Rates correct at 02/06/2009. --Find out more about scorching savings at

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