17:51 18 November 2012
Savings rates continue to slide, but there are ways you can fight back against plummeting returns.
Not so long ago, several easy access accounts offered interest six times' higher than the current Bank of England base rate of 0.50%, but now not one pays over 2.50%.
Principality Building Society, for example, has just slashed the rate on the latest issue of its eSaver account from an annual equivalent rate (AER) of 2.65% to 2.30%, while both Scottish Widows Bank and Skipton Building Society have withdrawn their accounts which both paid 2.60% AER.
In fact, according to research by MoneySupermarket, across the top five easy access accounts, the average rate is a paltry 2.45%.
Here, we look at what savers can do to ensure that they continue to earn as much interest as possible, despite falling rates.
If you have opened an account paying a high rate of interest but which includes a steep bonus in the rate, make sure you've made a note in your diary when the bonus disappears. Move your money as soon as possible once it has gone, otherwise you'll be left earning often dismal rates of interest.
That is not to say that accounts which pay bonuses aren't worth considering - often they pay the best rates of interest, but you do need to be vigilant and transfer your cash to an alternative high-interest paying account at the end of the bonus period.
For example, Nationwide Building Society is currently paying 2.50% AER on its MySave Online Plus account which can be opened with a minimum investment of £1,000, but this rate includes a 0.97% bonus which is only payable for the first 12 months, so you will need to move your money then, or you'll end up earning 1.53% AER.
Similarly, Derbyshire Building Society's NetSaver Issue 7 account also pays 2.50%, but this rate includes an even bigger 1.50% bonus which is payable until the end of February 2014. That means if you don't transfer your money out of this account then, you will end up earning a paltry 1.00%. The Derbyshire account can again be opened with a minimum investment of £1,000.
If you have at least £10,000 to invest then the West Brom's WeBSave Easy Access 5 account is offering a rate of2.52% AER which includes a 1.00% until the end of 2013. However, it's not a true easy access account as you will only be permitted to make four withdrawals a year.
Lock into a fixed rate account
If you are fed up with falling rates, then one of the best ways to ensure your returns won't suddenly nosedive is to save into a fixed rate account. As their name suggests, returns are fixed, so regardless of what happened to the Bank of England base rate, you know your savings rate won't change during the fixed rate period.
However, bear in mind that these accounts won't suit savers who need regular access to their money, as they usually don't allow withdrawals.
Current top short-term fixed rate accounts include FirstSave's one-year Fixed Rate Bond 22 and State Bank of India's one-year Hi Return Fixed Deposit account which both pay 3.00% AER and can each be opened with a minimum investment of £1,000.
You can opt for a compromise either side of the 12-month mark too. United Trust Bank's nine-month Fixed Term deposit account paying 2.71% AER is also worth a look, while Metro Bank's 18-Month Saving Special Offer account pays 2.75% AER. These accounts can both be opened with a minimum investment £500.
If you can afford to tie your money up for longer, then returns are even higher. State Bank of India's five-year Hi Return Fixed Deposit account, for example, pays 4.20% AER on a minimum investment of £1,000, while its four-year bond pays 3.80% on the same amount.
Vanquis Bank's 5 Year Fixed Rate bond, meanwhile, pays 3.51% AER on a minimum investment of £1,000. Vanquis also offers the market-leading rate on its three-year bond, which pays 3.11% AER, again on a minimum investment of £1,000.
Consider offsetting your savings
Another way to fight back against falling savings returns is to consider an offset mortgage. These enable you to link your savings, and often your current account, to your mortgage.
Rather than earning interest on your savings, you don't pay it on the equivalent amount of your mortgage debt.
As you don't earn interest on your savings, there is no tax to pay on them, and you can still access your money at any time.
For example, assuming a £150,000 capital repayment mortgage at a rate of 3.00% borrowed over 25 years, someone with £30,000 in savings would save themselves £10,039 in interest and repay their mortgage three years early.
In addition, a basic rate tax payer could save £3,653.32 in income tax, and a 40% taxpayer would save £7,306.63 in income tax that they would have to pay if their money was in a standard savings account paying 2.00% AER.
A basic rate taxpayer would need to earn the equivalent of 3.75% or more on a standard savings account in order to generate an equivalent return to the benefit offsetting would have, but there are currently no accounts that enable you to do this.
A 40% taxpayer would need a savings account paying 5.00% or more, while someone in the 50% band would need to be earning at least 6.00%.
Clare Francis, mortgage expert at MoneySupermarket, said: "The advantages of an offset mortgage are evident to see for people who have decent savings pots but who are struggling to find a real return for those savings.
In addition, offsetting can also save you tax - usually, you pay income tax on interest you earn on your savings.
However, because you don't earn any interest if the money is offset against your mortgage, there is no tax to pay, making this a particularly attractive option for higher and top rate taxpayers."
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