Five ways the banks cut savings rates and hope you won't notice

	Rate (AER)	Notice	Min
	6.52%	No Notice	1
	6.51%	No Notice	1
	6.50%	No Notice	1
	6.30%	No Notice	1
	6.16%	No Notice	1
* Based on £1 Instant Access and is a limited guide to the market

Savers should keep a careful watch on their accounts, to make sure they are getting the best rates. Speculation that the Bank of England is set to raise its base interest rate in the near future could lead savers to think that the only way for their interest rates to go is up. They could not be more mistaken.

Banks and building societies are sneakily cutting the rates paid on savings accounts, using some clever ruses. According to Moneyfacts, more than 40 financial institutions have trimmed rates on different savings accounts in recent months, and there will no doubt be more to come.

Here's how they try to make sure you don't notice:

Cutting rates on just some accounts

Some banks change the rates on a couple of accounts at a time, hoping people don't spot that theirs has been affected. NatWest cut the rates on some of its accounts back in January and cut some more in April.

Barclays has just cut the rates on its e-savings and mini cash ISA accounts by as much as 0.45%. Standard Life Bank has also trimmed rates on some of its accounts.

Andrew Jones, retail banking product director at Barclays, defended the bank's latest cut by saying, "Most of our main competitors have already changed their savings rates, and we have taken the opportunity to review ours."

Introducing new rate tiers

Rachel Thrussell, of Moneyfacts, says, "Introducing new tiers is one way that the banks try to tweak rates without appearing to have cut them."

Barclays has cut the rate on its 60-Day Saver by up to 0.4%, depending on the size of the balance, while the Reward Saver has been cut by 0.25%.

How much you have in your account can make a big difference to the rate of interest you get. Portman Building Society pays a not-overly-generous 3.35% gross on £25,000 on its instant access account, which falls to a meagre 0.70% for accounts containing £250. If the balance falls below £250 the rate is a barely perceptible 0.10 before tax.

The Manchester Building Society recently realigned its savings accounts and now pays an astonishingly mean 0.25% on any account with less than £2,500 in it.

Cutting some rates a lot and some by just a little

"Another ruse is to cut some rates by quite a lot and others by a minimal amount, so that the average rate cut across the accounts is reduced," says Thrussell.

Loughborough Building Society has just announced it is to reduce its rates by up to 0.3% on some accounts, but less on others

Introductory Bonus, which disappears after a few months

One of the sneaky ways that banks can cut rates is to use introductory bonuses, which give an attractive headline rate but leave savers with a poorer return after the first few months.

Sainsbury's Bank says savers are often better off choosing an account that offers a consistently attractive rate, which is not reliant on a short-term bonus.

Research by the bank found that the average return on no-notice accounts with introductory bonuses for balances of £1,000 is 4.23%. However, since their average bonus is 0.63%, this falls to 3.60% once the bonus rate comes to an end.

Peter Wood, director of savings at Sainsbury's Bank, says, "Over two years, someone saving £10,000 in a leading savings account paying 5.01% interest for the first six months and then 4.3% once its bonus of 0.71% expires, would receive around £54.50 more gross interest if they had chosen the Sainsburys Bank Internet Saver instead, which pays 4.75% on a balance of just £1."

Limited rollover period

Savers with fixed-rate bonds are sometimes offered a limited opportunity to roll them over into a new issue. Once the rollover period has expired, the bank or building society offers a new bond at a higher rate to attract new money, but has, meanwhile, trapped the rollover customers at the lower rate.

Whatever type of account they choose, savers need to get a return after tax of 3% simply to equal inflation measured by the annual rise in retail prices (the retail price index - the inflation measure the government would prefer you didn't look at), if they are not to see the spending power of their cash eroding.

As a benchmark, you should be looking for a savings rate deal that equals or beats the current base rate of 4.5%.

15 July 2008 © Moneyextra.com

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