Charter Savings Bank launches best buy one-year fix at 6%

Charter Savings Bank has launched a new best buy one-year fixed rate of 6 percent.

The best buy deal beats Vanquis Bank’s 5.9 percent at the top of independent This is Money’s best buy savings tables.

A person who puts £20,000 in Charter’s account could earn £1,200 in interest in a year.

Depositors’ deposits are protected up to £85,000 per person by the UK’s Financial Services Compensation Scheme.

The account can only be opened online and depositors need a minimum deposit of £5,000 to get started. After that, they can deposit up to £1 million.

Interest is paid annually on the anniversary of the first deposit. No withdrawals are allowed during the fixed-interest period.

Charter has also launched a new two-year best-buy fix, paying 6.1 percent, which is currently the highest paying deal of any fixed income deal currently on the market.

Someone who puts £20,000 into their two-year fix earns £2,440 in interest over the 24-month period.

However, depositors who deposit such large sums into either account are likely to face tax bills.

This is because the personal savings deduction only allows base rate taxpayers to earn £1,000 interest free each tax year, while higher rate taxpayers only get a £500 allowance and supplementary rate taxpayers get no allowance at all.

Some savers may therefore prefer to opt for Charter’s new one-year fixed rate cash Isa, which pays a market-leading 5.2 percent.

All interest earned is tax-free, which means it can be more lucrative for some higher-rate taxpayers with a higher rate.

James Blower, founder of the Savings Guru website, says savers should start thinking seriously about the tax implications of using standard savings accounts.

He warns: ‘A higher rate taxpayer who puts £20,000 into the Charter 6 per cent agreement will earn £1,200 interest per annum, which will result in a tax bill on the £700 (assuming they don’t use personal savings anywhere else) – that’s £280 in tax, bringing the return back to £920.

‘The same Isa’s in one of the best one-year fixed-rate cash earn 5 per cent or more and therefore earn more than £1,000 a year without tax.

“So despite the rate difference, the tax situation for some savers is changing considerably.”

Will we reach a peak for savings interest?

Savings rates have risen at an almost relentless pace in recent weeks, with providers seemingly scrambling over each other to take the top spot on top buy lists and entice savers.

This month alone, Smartsave, one of the rival challenger banks, increased its one-year fixed rate 14 times as it did to become the market leader.

Based on the current evidence, it’s hard to call when the savings frenzy of new best buy deals will subside.

However, Anna Bowes, rate controller and co-founder of Savings Champion, thinks we may now be approaching the peak for fixed rate savings deals.

This is because banks are willing to raise their rates thanks to market expectations about where the Bank of England’s base rate will peak.

These expectations are reflected in swap rates. A swap is essentially an agreement in which two banks agree to exchange one stream of future fixed interest payments for another stream of floating interest payments, based on a fixed price.

Swap rates have risen recently, partly because inflation is proving to be more stubborn than expected and markets are now expecting the Bank of England to raise key rates to 5.75% or even 6% later this year.

Bowes says: “With an annual swap rate still rising and currently at 5.836%, more could follow, but we may be close to the top now.

And it’s interesting that five-year swap rates are lower – currently at 4.904%, indicating that base rates will peak and then fall somewhat in the near future.

“So savers might want to consider tying up some of their money a bit longer at the rates that are available now because rates could be lower a year from now.”