Make the most of your savings

Savers trying to make sure they keep their cash in the best savings accounts will be dismayed to see rates tumbling, even though there has been no cut in the Bank of England base rate since August.

Among the banks to slash their rates so far are ING Direct, which cut a quarter of a percentage point (0.25%) off its accounts just before Christmas, the AA, Abbey, Alliance & Leicester, NatWest, Halifax, Lloyds TSB and Co-operative Bank's internet arm, Smile.

Even the building societies have not been immune from the rate-cutting frenzy. West Bromwich started the trend among societies in November; Nationwide cut between 0.05-0.2% from its savings accounts in January; the tiny Beverley Building Society is reducing its ISA rates from 5.05% to 4.85% and its 120-day notice account from 4.75% to 4.65%; Scarborough has cut rates on a number of accounts, Leeds has cut back its Online Saver, and the Manchester has cut the rate on its Easy Access account from an slender 0.5% to a positively skeletal 0.05% gross.

Rachel Thrussell, head of savings at Moneyfacts, says, "The cut of 0.25% by ING was heavily criticised last month. However, savers need to be aware that rates are also being chopped by some of the other 'big players' in the savings market.

"Existing customers should regularly check the interest rates on their accounts to ensure they are still getting the best deal."

Simply shifting it over to an account with a better headline rate might not be the answer.

Says Thrussell, "Just because we haven't seen a cut in base rate for five months, savers shouldn't automatically assume that the interest rate on their savings account will remain untouched."

Even if the base rate remains unchanged in the near future, many banks and building societies say that they will have to cut their own rates to savers soon, as they struggle to protect their margins.

Nationwide defended itself by saying, "Our rates are still around 0.4 of a percentage point better than the market average."

So what can savers do to make sure they are getting the most out of their cash?

Look for a savings institution with a good track record

This is often a better policy than constantly chasing after flash-in-the-pan rates, set to catch the eye of new savers, which are certain to fall as soon as enough money has been attracted in.

Look if there is a better account at your bank

Rachel Thrussell says, "The recent reductions have been on selected products only, rather than being 'across the board' cuts.

"You might find a better deal at your existing bank or building society. Switching across should be easier, as you should not need to go through all the ID procedures of opening a new account.

"Even though rates are being cut, institutions continue to be selective with which products are impacted. In many instances they still compete for the personal savings account market, by offering headline rates to attract new customers. For example, First Direct has cut rates on some accounts by up to 0.24%, yet their e-savings account remains untouched and offers a headline rate of 4.89% (although consumers should be aware that if a withdrawal is made on this account, no interest is payable for that month)."

Consider switching to net or telephone account

These usually pay more than branch-based accounts. Bradford & Bingley's eSaver is currently paying 4.85%. The minimum opening balance is £1,000.

Make sure you get your tax breaks

If you are a taxpayer, make sure you take advantage of your individual savings account (ISA) tax-free allowance of £3,000 (unless you intend to use up your allowance as a maxi-ISA to buy stocks and shares). Not only are your savings tax free, but you can often get a better rate on ISA accounts than you can on ordinary saving and notice accounts.

If you are not a taxpayer, and you have savings in an account which usually has tax taken off at source, make sure you have filled in form R85 (available from your bank or building society), to enable you to receive the interest tax-free. If you have already had tax taken off in the current year, and you fill in R85, it should be possible for the tax to be recredited to your account. If you have paid tax in a previous tax year, the bank wont be able to recredit it. In this case, fill in a Claim for Repayment form R40, available from HM Revenue & Customs online or from your local tax office.

Look out for special accounts for your age group

Special accounts for children, young people and older savers are not always best buys, but many are. For instance, the Harpenden Building Society's 21 Club account for savers aged between 18 and 21 is paying a healthy 5%, 0.45 points more than the societys ISA.

Saffron Walden's Ladybird account for under-16s and the v4 account for 16-23 year olds, also paying 5%, pay the same as its postal ISA but more than its branch-based account.

Don't be beguiled by headline rates

Look out for tricky deals, with bonuses and penalties, unless you are sure you can get the bonus and avoid the penalty. If you can do both, that's fine, but if you don't get the bonus, and you lose interest for withdrawing you cash, you could be worse off than if you went for an account with a simpler structure and a lower headline rate.

For example, the apparently best buy Portman 25-day notice ISA pays a headline-grabbing 5.25% tax-free, if you include the introductory bonus rate of 0.75% for the first six months. However, if the balance falls below £3,000, the interest rate plummets to a nugatory 1%. If you want to withdraw money from the account you have to give 25 days notice, or lose the equivalent in interest, and if you switch to another ISA provider you will pay an admin fee of £30.

14 February 2006 © Moneyextra.com

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Our senior editor Robin Amlôt recommends you should consider taking independent financial advice before acting on any article. Please contact us for help with your individual circumstances if any assistance is required.