Highest Rate Savings Account

Which bank will give you 5.2% on your savings?

By Emily Hohler

British savings accounts have been blown out of the water by the arrival of a new internet-only account which pays 5.2% and guarantees interest will exceed the Bank of England base rate (currently 4.75%) by at least 0.25 percentage points until October 2009. From then on the interest will be at the base rate or above until 1 October 2011, making it the longest guarantee of its kind in the UK. So what is this account called?

It's IceSave, the new savings account from Iceland's Landsbanki. It sounds great, but the amazing thing is that it really is great. IceSave seems to be using none of the tricks its new competitors do to nudge themselves to the top of best-buy tables. There are no introductory bonus rates, no forfeits for withdrawals and no upper limits on the sum you can pay in each month. You can deposit any sum up to £1m. The only thing to watch out for is letting your balance fall below £250: Landsbanki clearly don’t want very small accounts, so if you have less than that, they’ll pay you only 0.5% in interest.

This is great news for savers, not least because it is likely to “spark a rates war”, says Esther Shaw in The Independent on Sunday. Alliance & Leicester has already had a go, launching its Direct Saver, an easy-access account paying 5.38%. But compared to IceSave, this just doesn’t cut the mustard: to get the good rate, you need a minimum deposit of £5,000 and there is a very big caveat – each time you make a withdrawal, you won’t be credited with any interest in that month.

It is probably worth waiting a few weeks before opening an IceSave account, first to make sure it’s not plagued by service problems and second so you don’t miss out on any more generous offers from from other providers. That said, even if someone else comes up with a better rate, IceSave may still be the best option, given the length and generosity of its guarantee.

Keeping an eye on rates is important. With inflation at 2.5%, savers need to make their money work. A higher-rate payer needs to get at least 4.17% paid on their savings to make a real return, says Ali Hussain in The Sunday Times: if you are getting just 3%, you may think that’s fine, but take tax on the interest into account and you will find £10,000 saved will be worth just £9,338 in real terms after a decade. More than half of all savings accounts around today fail to provide higher-rate taxpayers with positive real returns.

If you are interested in saving money on your weekly shop, help is at hand in the form of Mysupermarket.co.uk. The website will run your weekly list through the virtual tills at Tesco, Asda, Sainsbury’s and Ocado and then transfer the whole trolley to the cheapest supermarket’s online checkout.

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