Where best to invest as rate rises again?

Savers up and down the country will today be rejoicing at the news that the Bank of England has put the base rate up by a quarter point once again.

"It's good to see there has been a turn around for savers and people are starting to get a better deal on their investments," says Peter Gerrard, senior researcher from Moneysupermarket.com. "Last year the very best savings accounts were paying, at most, 4.5%. But now there are accounts paying up to 5.5%."

Isas, which have had a particularly slow start to the year (investment is down by ?44m on last year according to the Investment Management Association), are still the best place to start saving. One can invest up to ?3,000 a year tax free until 2006 (when it will go down to ?1,000).

There are three questions to consider before putting money into any savings account. What's the maximum rate of return? Will the rate go down? When can I access it?

The best paying accounts historically tend to lock your money up for a set period. In return it gives you peace of mind and fixed interest on your money.

For example the best Isa on the market, by far, is from the Newcastle Building Society. Its two-year fix pays 5.85% on ?1. Funds can be withdrawn at anytime but will incur a 90-day loss of interest penalty. This remains an attractive rate despite the fact that today's increase will not be passed on to this account.

Other high paying Isas come with a catch - the introductory bonus. The high rate advertised is designed to lure savers in and relies on their apathy to stop them moving their money once the rate has gone down.

Take the account from the Lambeth building society. Its headline rate pays a respectable 5.4% on funds above ?1,000. But look closer and this has a six-month introductory bonus, which means the rate will drop to 4.9%. Considering today's rate rise it's already looking uncompetitive.

If, however, savers can compromise between the two options above, in other words a good rate, instant or fairly instant access, but without a drop in the rate after six months or a year, then Abbey has an attractive alternative. It pays 5.1% on ?1. Add today's rate increase - and this account looks very inviting to the canny saver. But of course it depends on your priorities.

Internet-only savings accounts are the next best place to save. The banks have low overheads as customers make all the transactions themselves, which is reflected in the AERs. There has also been an influx of new accounts entering the online market - which means there are some very competitive rates to be had.

Cahoot has one of the best easy access accounts, says Peter Gerrard. Its new account pays 5.5% on investments of ?1 up to ?50,000.

"It's an excellent rate and it is guaranteed to be at least 5.5% or higher for a 12-month period," he said.

This should increase from September 1, when the institutions pass on the base rate rise to customers, which makes it the best savings rate on the market.

Alliance & Leicester, which launched its online account a couple of months ago, pays 5.1% on ?1 with no bonus. And the most recent entrant is from Leeds & Holbeck building society, launched two weeks ago, which pays 5.05% for investments over ?100, with no bonus.

Traditionally notice accounts pay slightly higher rates than no notice accounts because savers aren't allowed to access their funds instantly. But recently the gap has narrowed to the point where you wonder who would put money into a 90 day notice account when you can get a better rate in a no notice account?

To demonstrate, Heritable Bank has a 90-day notice account, minimum investment of ?5,000 paying a rate of 4.80%. But then there's that instant access online saver from Alliance & Leicester, paying 5.1% on ?1.

Rachel Thrussell, savings expert from Moneyfacts, says these accounts are popular with the older investor who is used to saving in this way as a form of deterrent. "If they want to save money they put it in a notice account because they know they can't get at it without a penalty. If they put it in an instant access the temptation to spend it is higher," she said.

Current accounts have been hitting the headlines recently for paying rates as high as many savings products. But they don't come without catches. Most require its customers to pay in a minimum salary per month, (usually ?1,000 plus), in order to benefit from the rates.

For example, take the Alliance & Leicester premier plus account. It pays 5.5% for credits between ?1,000 and ?2,500 per month. Put more than ?2,500 in and the AER dramatically falls to 0.1%.

Looking at Lloyds TSB's classic plus account, it has similar stipulations. Its customers must pay in between ?2,000 and ?5,000 per month to obtain a rate of 5%. But customers must also log on to the internet banking service three times every three months to benefit from this rate. Both accounts offer interest free overdrafts but neither will replace an ordinary savings product, which leaves one wondering whether these rates just a gimmick designed to grab attention.