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Good news for savers as inflation falls

By MoneySupermarket.com  |  Posted: June 27, 2012

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Savers breathed a sigh of relief this week as the latest figures show inflation fell to 2.8% during May - its lowest level for two and a half years.

At the same time, rates on easy access accounts have been steadily climbing in recent weeks. The Post Office announced a market-leading rate of 3.17% at the end of May, prompting Santander to up the stakes with a rate of 3.20% on its Easy Access eSaver

Further to this, West Bromwich has also now waded into the price war offering a rate of 3.19% on its Direct Bonus 4 account.

However, this double whammy of good news is not a signal to rest on your laurels -especially when it comes to squirreling money away for the long term, as returns on longer-term investments are the lowest they have been for years.

We look at how now is the time to step up the search for the best savings account.

Falling inflation

Inflation as measured by the Consumer Price Index (CPI) fell from 3% to 2.8% during May, pushing it to its lowest level since November 2009. This now also brings it closer to the Bank of England's central target rate of 2%.

"The fall in inflation for the second month in a row is great news for hard-pressed savers and should really offer a boost to those struggling to gain any real returns on their savings pots," says Kevin Mountford, MoneySupermarket's head of banking. "Consumers should take advantage to maximise returns."

As a saver it's worth noting that to beat inflation, a basic rate taxpayer now needs to find an account paying at least 3.5%, increasing to 4.67% for a higher rate taxpayer.

According to figures from MoneySupermarket, there are currently 101 fixed-rate bonds and 30 fixed-rate cash individual savings accounts (ISAs) to choose from that will negate the effects of inflation.

At present, Halifax is topping the tables for cash ISAs with a five-year fixed rate deal at 4.25% and a three-year fix at 4%. Both rates are paid on a minimum of £500, and both permit transfers in.

The top one-year fixed-rate bond is currently being offered by Cahoot which is paying a rate of 3.6% - though on a minimum opening balance of £25,000.

Rising rates on easy access accounts

While the rates paid on easy access accounts are generally lower than the rates on fixed rate accounts, they have been heading upwards in recent months.

At the end of May, the Post Office launched an easy access account with a market-leading rate of 3.17% (variable) with its Online Saver (Issue 5). This includes a small bonus of 1.52% for the first 12 months - so you will need to note down when this ends, so you remember to move your money at this time. It also offers unlimited free withdrawals.

This product will be coming off the market on Friday 22 June - so you need to act fast to snap up this deal. Earlier this month, the Post Office launch was swiftly followed by the launch of Santander's Easy Access eSaver (issue 5) account paying 3.2%.

While this is a table-topping rate, it does come with a hefty bonus of 2.7% for 12 months - meaning the rate will drop considerably at the end of the bonus period to just 0.5%. This rate is paid on a minimum of just £1, and unlimited withdrawals are permitted.

In the latest move on 20 June, West Bromwich launched the Direct Bonus 4 account paying 3.19%. The rate on this account, which is exclusive to MoneySupermarket, is competitive, and puts it in second place behind Santander in the "best buy" tables.

However, you do need to be aware that this it comes with restrictions such as a minimum deposit of £10,000, as well as just four penalty-free withdrawals per year.

That said, the bonus on this account is smaller than the bonus on the Santander account at just 1.68% which means that less harm is done if you forget to move your money once the introductory bonus ends.

The next best easy access offering is from ING Direct which is paying 3.15% on a minimum of £1. While there is a sizeable bonus of 2.61% for 12 months on this account, unlimited withdrawals are permitted without penalty.

Investing for the longer term

Things are certainly looker brighter for those putting money away for the short term, but the outlook is not quite so rosy for those with a longer investment time-frame.

New findings from HSBC show that longer-term fixed rate savers are facing a "savings precipice" when they come to reinvest, as rates for long-term products continue to fall.

More than 4.9million fixed-rate products worth almost £94 billion are set to mature in 2012, however, its analysis shows that those who have invested in the 2.3million fixed-rate products that have matured so far this year, will lose £124million in income if they simply invest their nest egg into similar products.

Most of the loss of income is down to longer-term products, with shorter-term bonds generally offering increased returns.

Those who put their money into one-year and 18-month bonds will see a slight rise in returns by reinvesting in the best buy products currently available.

However, those who lock their money away for longer are likely to see the largest decline in returns, with four-year products showing the largest fall in investment.

If you have money slotted away in the 2.6million fixed-rate products due to mature over the rest of 2012 - and particularly four and five-year bonds - you need to think carefully about the best place to put your money.

"Savers are often drawn to the security of fixed-rate products, as well as the higher returns compared to easy access accounts," says Kevin Mountford. "But if you are looking to reinvest your savings you need to research hard to find the best rate you can."

Don't rest on your laurels

As a saver, it's vital to heed these warnings, and remain proactive when it comes to finding the best home for your hard-earned cash.

This is more important than ever in the light of new research by accountant UHY Hacker which shows British savers are facing losses of £18 billion per year thanks to ultra-low interest rates and above-target inflation.

According to the findings, the Bank of England's 0.5% base rate and £325 billion of quantitative easing is partly to blame, exacerbated by a lack of competition among high streets banks.

"Savers need to shop around to find the best possible rates available - and to ensure they are getting the most bang for their buck," says Kevin Mountford. "You can't afford to sit back. You need to put some effort into searching out the top-paying deals to ensure your money is working hard for you."

Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.

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