Six solutions for suffering savers

Savers have lost £43 billion since the base rate fell to 0.5%. Here's how to fight back!

With the base rate expected to remain stuck at 0.5% for at least a year, savings rates are not expected to increase any time soon. Indeed, rates may not start moving up significantly until, say, 2013.

So, what can savers do to make the most of their money? Here are six solutions for suffering savers:

1.     Try to beat inflation

On Tuesday, the Office for National Statistics revealed that the Consumer Prices Index (CPI) measure of inflation climbed to 4.5% in August. In other words, the cost of living is rising quite steeply, with goods priced at £100 in August 2010 costing £104.50 a year later. Another measure of inflation, the Retail Prices Index (RPI, which includes housing costs), was even higher, at 5.2%.

Of course, high inflation erodes the buying power of your money, making cash worth less over time. Alas, the government's savings arm, National Savings & Investments, withdrew its Index-linked Savings Certificates a week ago. Savers can no longer rely on these inflation-busting bonds, which paid a tax-free rate equal to the RPI plus 0.5% a year for five years.

However, there are alternatives to NS&I. Yorkshire BS offers the Protected Capital Account 8, an inflation-linked bond that pays 16% before tax over six years, or 100% of the increase in the RPI, whichever is greater. However, this bond is not a traditional savings account, plus the return is taxable outside of an ISA or SIPP. The minimum investment is £3,000 and the maximum is £85,000.

The Post Office offers a five-year, inflation-linked bond paying RPI plus 1.5%, as well as a three-year version paying RPI plus 0.5%. You can deposit between £500 and £1 million. This interest is taxable and this bond cannot be bought inside an ISA. Be warned: this product will be withdrawn this Friday, 16 September at the latest!

Lastly, Cambridge BS has an inflation-linked account paying RPI plus 1% for five years on sums of £5,000 to £85,000. Again, this interest is taxable and the bond cannot be bought inside an ISA.

2.     Don't pay tax

With savings rates so low, it would be crazy to pay tax on what little interest you get. For basic-rate taxpayers, tax is a fifth (20%) of pre-tax interest; this doubles to 40% for higher-rate taxpayers.

That's why every saver aged 16 and over should have a cash ISA, which sounds scary, but is nothing more than a tax-free savings account. The maximum deposit into a cash ISA is £5,340 in the 2011/12 tax year, which should be enough for anyone saving below £445 a month.

In addition, once you've got an ISA, keep an eye on your savings rate. Here's how my father increased his ISA return by 15 times!

3.     Raise your rainy-day rates

Everyone should have some rainy-day or emergency money on deposit in an easy-access savings account. Alas, the average pre-tax rate paid by these accounts is currently below 0.8% a year, which is pretty awful.

The good news is that you can quadruple this average rate with the latest Best Buy for easy-access accounts. Launched on Monday, the Derbyshire BS NetSaver (Issue 1) pays 3.18% a year, which includes a bonus of 2.18% to 30 November 2012 (move your money to a new Best Buy on this date). You can deposit between £1 and £1 million into this unbeatable online account.

4.     Get a fix

The longer you're prepared to tie up your money, the higher the fixed rates on offer.

Top one-year fixed rates range from 3.3% to 3.5% a year; over three years, the highest rates are between 4% and 4.25%. If you're prepared to put your money in handcuffs for five years, then pre-tax rates of up to 4.65% are on offer (from SAGA).

One word of warning: don't lock away money that you may need in the near future. Otherwise, you will have to pay a penalty to withdraw funds from fixed-rate accounts.

5.     Squirrel more away

If your savings aren't producing enough interest, then one option is to build up more cash. For example, you could start a new savings plan, using a direct debit or standing order to save a fixed sum each month. The good news is that several regular-savings plans pay interest of 4% or more on small sums.

For instance, the Norwich & Peterborough BS Regular Saver pays 4% on monthly deposits of £1 to £250. This rate is fixed for 12 months, after which you should close your account and move on. As with all regular-savings accounts, there are penalties: withdrawals lead to a 1.5% loss of interest, as do missed payments.

6.     Become an investor

If you're really fed up with low savings rates and are willing to risk your capital, then look to high-quality, high-yielding investments.

For example, you could buy retail bonds -- IOUs paying 6% a year or more that are issued by financially strong, well-known companies. However, there is no government safety-net protecting these bonds, so there is a slim chance that you may not get back all you invest.

Alternatively, you could buy a few high-yielding, big-company shares which pay generous dividends to shareholders. This cash income is usually paid twice or four times a year, and can exceed 5% a year. For example, Marks & Spencer shares currently pay a dividend worth 5.3% over the coming year, as do shares in oil giant Royal Dutch Shell.

Even higher dividend yields are available from big insurance companies: Aviva pays 8.7%, RSA Insurance pays 8.1% and Standard Life pays 6.8%. Even if these dividends were to halve, they would still thrash most savings accounts!

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