Still time to fix

By SYLVIA MORRIS, THIS IS MONEY AND DAILY MAIL SAVINGS EXPERT
Updated: 19:00 EST, 22 October 2004

MONTHLY income seekers can earn more than 5% before tax in fixed-rate and variable-rate accounts.

Rates offered by fixed interest accounts have dropped in the past few weeks and are now lower than a month ago, when Money Mail urged savers to take up the deals.

Then you could earn 5.5% to 5.6% before tax on a deal fixed for one year. Now 5% to 5.2% is on offer. Top three-year deals are now at 5.4%, against 5.75% just a few weeks ago.

Savers might have missed the peak, but current deals are still attractive. They pay more than the Bank of England base rate, which remained unchanged at 4.75% this month, and because the rate is fixed, you are guaranteed to keep earning these high levels.

The outlook for interest rates has changed as economic growth slows and the housing market loses momentum. While economists thought there would be up to two more 0.25 percentage-point rises in base rate before interest rates peaked, they are now saying just one more rise is likely before rates start to come down next year.

Jonathan Loynes, chief UK economist at Capital Economics, says: 'We are still forecasting one more 0.25 percentage point rise in base rate, but this is looking less likely now. We are at or near the peak in interest rates. They will come down in the second half of next year if the housing market continues to slow.'

Jeremy Peat, group chief economist at RBS, says: 'We have revised our forecast and now expect just one more 0.25 percentage-point rise, with base rate peaking at 5% before starting to fall towards the end of next year.'

But fixed rates on money markets, where banks and building societies go to raise money, are still higher than base rate and this gives savers an opportunity to fix in before rates fall.

Among the best deals for monthly income is Derbyshire Building Society's Two-Year Flexible Bond, minimum £500, paying 4.30% (5.37%). It also gives you penalty-free access to some of your capital during the term.

On variable rate accounts, last month Northern Rock launched its leading Silver Savings account for investors aged 50 or more, paying 4.08% (5.1%) for monthly income on a minimum £10,000.

The rate is variable, so it will change with Bank of England base rate. But Northern Rock pledges that the annual rate paid on the account will at least match base rate until January 1, 2010.

Another top account is the telephone-based Tracker Guarantee account from Scarborough Building Society, also paying 4.08% (5.1%) for monthly income seekers on a minimum balance of £5,000.

• RON and Ada Phillips, pictured with grandchildren Sian, 13, and Callum, 12, have a three-year bond giving them a fixed monthly income which they took out with Skipton Building Society early last month.

Ron, 71, a retired joiner from near Rochdale in Lancashire, says: 'I tried to be a bit cautious with money when I was working, so we have built up savings over the years. I now use it to find a good monthly income to boost our pension.

'I like fixed rates as I want to know how much is coming in each month. We also have savings in an easy access account, so our money is not all in one pot. As a basic-rate taxpayer I have also put money into cash mini Isas for tax-free interest.'

When the couple bought their bond, Skipton paid 4.4% after 20% savings tax (5.5% before savings tax). Its current three-year fixed-rate bond pays less at 4.16% (5.2%).

• BOARDS: More on savings rates