This won't be welcome news for savers and it makes it more important than ever to scour the market and make sure you are getting the most for your money. So which accounts are paying the highest rates?
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The good news is that even though the base rate is at a historic low, the leading savings deals are paying significantly more than 0.5% and the fixed rate arena is where you can find the highest returns. However, the trade off is you relinquish access to your money as most fixed rate bonds don't allow you to withdraw money during the fixed term, or they'll charge you a penalty for doing so.
If you have money you can afford to lock away, Yorkshire Building Society's 5-Year Fixed Rate Bond is paying the leading rate at 5.30%. Five years may be too long for some people, so if you'd prefer a shorter term deal, Barnsley Building Society and ICICI Bank are offering the highest rate at 4.70%.
In the two-year market, the Islamic Bank of Britain tops the tables with its Fixed Term Deposit Account which pays 4.50% on investments of £5,000 or more.
The account isn't restricted to Muslims - non-Muslims can also apply - and the IBB is regulated by the Financial Services Authority and is signed up to the Financial Services Compensation Scheme so savers have the same level of protection as with all other UK-registered banks and building societies: the first £50,000 is totally guaranteed (£100,000 if the account is in joint names).
However, unlike most fixed rate accounts you are not guaranteed to receive the rate of 4.50% for two years. The reason for this is that it is an Islamic account which follows the Sharia principles and under Sharia law savers can't earn interest on their money. Therefore, technically, the 4.50% annual return isn't a rate of interest - instead it's a 'target profit rate'. So if the bank doesn't hit its profit target the return will be lower.
If you'd prefer an account that guarantees the rate, The AA's two-year Internet Fixed Rate Bond is paying 4.35%.
But easy access can still reward
While fixed rate accounts are paying the highest rates, you can still earn a return that is significantly higher than the 0.5% base rate with an easy access account.
For those wanting to retain access to their money, the Citibank Flexible Saver Issue 6 is paying a market-leading 3.30%.
As well as being the most competitive easy access rate, the minimum balance is just £1 so you don't need to deposit a large amount on opening or worry if you dip into your savings over the course of the year. Additional deposits can be made at any time and there are no penalties if you make a withdrawal.
However, it's important to note that the headline rate includes a 12-month fixed rate bonus of 2.25%, so the gross rate will then drop to Citi's standard rate which is currently just 1.00% - at that point you should see what other savings accounts are available as you'll probably be better off moving your money elsewhere.
The other key point about this account is that it is only available to new customers so if you already have a savings account with Citi, you won't qualify.
Other leading deals include ING Direct Savings Account which, rather than including an introductory bonus, guarantees to pay an AER 3.20% for the first 12 months. Thereafter it drops to ING's standard rate which us currently 0.50%.
Sainsbury's Finance Online Saver is also paying 3.20%. The key factors to note with this deal is that you can only make three-penalty free withdrawals during the first year - if you make more than that the rate drops to Sainsbury's standard Online Saver rate which is just 0.5%. This is also the rate you earn after the first 12 months, so as with the Citi and ING accounts you should look to move your money again at that time.
Don't forget ISAs
With interest rates at rock-bottom, now is the time to make full use of your tax breaks and your annual ISA allowance is a really valuable one because returns are tax-free. Recent changes to the ISA rules mean the over 50s can invest £5,100 in a cash ISA this tax year - those under the age of 50 can invest £3,600. For more information on ISAs read our article 'New ISA rules explained'.
When it comes to the leading cash ISAs, fixed rate deals are paying the highest rates of interest: Leeds Building Society has a five-year account at 4.60% while the leading two-year deals are paying 3.75% - these include Halifax's Fixed Rate ISA Saver and Bradford & Bingley's eISA.
If you'd prefer an easy access account, First Direct's cash e-ISA is paying 3.0%. This is an easy access account although unusually the rate is fixed until 6 October 2010. Another competitive deal is Abbey's Direct ISA Issue 3. It is also offering a rate of 3.00% although this only applies on balances of £9,000 or more. This makes it ideal if you're looking to transfer money invested in previous tax years that is no longer earning a decent rate of interest.
Please note: Any rates or deals mentioned in this article were available at the time of writing. Products underlined can be applied for directly.
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