Are Your Savings ShrinkING?

Although interest rates are rising, many savers are being short-changed, including ING Direct customers. It's time to dust off your savings!

In order to tackle the problem of rising inflation (consumer prices going up), the Bank of England has raised its base rate five times since last August. This bout of rate hikes has taken the base rate from 4.50% a year to 5.75%, which makes it more expensive for British banks to borrow money.

Hence, banks have passed on this additional cost to their customers by increasing interest rates for borrowers. In particular, mortgage interest rates have been rising steeply (as I warned in this article), and interest rates for personal loans have been creeping up since late 2006.

As you'd expect, lenders hurry to pass on rate hikes to borrowers, because this helps them to maintain their profit margins. Likewise, it makes sense for banks and building societies to drag their feet when increasing the interest rates paid to savers because, again, this gives their profits an extra boost. However, some savings institutions are taking their customers for granted by delaying rate hikes for months, or not bothering to pass them on at all.

Take, for example, former Best Buy savings provider ING Direct, whose no-nonsense, no-strings savings account was once a favourite of The Fool. While the Bank of England's base rate has risen by 1.25% over the past ten months, ING Direct's yearly interest rate has lagged behind, rising by just 0.5% to 5%.

When it launched four years ago, ING Direct's table-topping account pulled in savers by the score. Indeed, it went on to amass more than million customers and total deposits of billions of pounds. However, its fall from grace has seen it drop out of the Best Buy tables and lose deposits worth an estimated £3 billion as savers withdraw their cash to reinvest at higher rates elsewhere.

My simple rule for savers is this: if your savings account isn't paying a before-tax rate of at least the Bank of England's base rate (presently 5.75% a year), then your savings aren't working hard enough. Furthermore, to find the Best Buys, aim to find an account which pays 0.25% or more over the base rate.

For example, let's say that you have £10,000 in an ING Direct account, earning £500 a year before tax. How much more interest could you earn by transferring this spare cash to a Best Buy easy-access account? Here's the answer, courtesy of the Fool's independent, unbiased savings search engine:

Best Buy easy-access/no-notice savings accounts for £10,000

(excludes notice accounts, accounts with introductory bonuses, fixed-rate and fixed-term accounts)

As you can see, these market-beating accounts all pay a yearly interest rate of 6.20% or more, and come with rate guarantees, which make them the stand-out winners in the savings stakes.

On a deposit of £10,000, ICICI Bank takes the gold medal with £630 a year before tax, Sainsbury's Bank gets silver with £625 and Icesave grabs bronze with £620. In other words, for every £1,000 moved from ING Direct to these accounts, you earn an extra £12 to £13 a year. This is well worth having, especially for larger sums, so please switch accounts and stop your savings gathering dust today!

More:Why Pay Tax On Your Savings? | Great News For Senior Savers