Deposit Accounts – The Good, the bad and the ugly.

If you’re a borrower – especially one whose mortgage is linked to base rate – that’s great news. But supposing you’re a saver? In particular, supposing you are a cautious saver – someone who doesn’t like taking risks and prefers the security of a deposit account?

Here the news is almost unremittingly bad. Rates on deposit accounts have fallen sharply and continue to fall – and with inflation now hovering around the 5% mark any capital invested in a deposit account is falling in real terms. At the moment the best deposit accounts are paying just over 3% – but while that sounds quite attractive when compared to a base rate of 0.5%, it doesn’t tell the whole story.

The problem for many investors is obtaining the best rates on their deposit accounts. A quick glance at some of the most attractive deposit accounts topping the ‘league tables’ show that nearly all of them include a bonus that artificially boosts the interest rate paid, typically for the first six or twelve months. Most investors simply don’t have the time to constantly monitor the rate they are being paid, and consequently may well find themselves with a poorly paying account when the bonus ends.

Remember too that any interest on your savings could be subject to tax, which will reduce the ‘headline’ rate of interest that you see advertised. And while savings in a cash ISA are tax free, the limit for the 2011/2012 tax year is only £5,340.

Not surprisingly, many savers have been asking their financial advisers whether deposit accounts are worth it any more. For most people the answer is ‘yes – but only for a limited amount of money.’ We all need to have an emergency fund, and an easy access deposit account is probably still the best place to keep that – even if you are receiving a low rate of interest.

But investors wanting a better rate of return are increasingly looking at products that offer security and the chance of capital growth, such as the Autopilot Growth Plan from RBS. While plans like this mean tying up some of your capital for a defined number of years, they can play an important part in financial planning for an investor who is relatively cautious – but who wants or needs the potential for a substantially better rate of return than that offered by a traditional deposit account.