Savings Providers Slash Rates

Savings providers have started slashing their rates following the recent base rate cut.

Some of the UK's largest savings providers - including Halifax, Nationwide, Abbey, ING and Natwest - have this week passed on the base rate cut and reduced their savings rates by at least 1.5%.

Other rate-cutters include Royal Bank of Scotland, HSBC, Northern Rock, Barclays and Lloyds TSB, meaning the vast majority of savers will see a reduction in their rates.

Some accounts, such as Halifax's Monthly Saver and the Lloyds TSB Select Saver and Instant Gold Savings accounts, will now pay just 0.1% interest to customers (although the Halifax account will pay more to those who meet the criteria for a bonus).

This is terrible news, as basic rate taxpayers need an account paying 5.6% to beat tax and inflation, while higher-rate taxpayers need at least 7.5%.

What's left?

Most providers will now pay significantly less than 6%.

One of the best remaining is the ICICI Bank UK HiSave Savings Account which pays 5.5%.

However, this is variable, so there is no guarantee it will stay at its current level.

In fact, with a further base rate cut expected this week, even if you bag the account with the market-leading rate today, it might not stay that way for long.

The only way to be sure of avoiding further cuts is to go for a fixed rate bond, which will pay a fixed rate of interest for a set period, such as a year - but during that year, you will not be able to access your savings.

If access is important to you, then you're better off going for a good all-round account, rather than prioritising the rate above all other criteria. Because in this market, you simply cannot be sure that the rate you get today will still be there tomorrow.

What to look for in an easy-access savings account

The 'interest-rate guarantee' is no longer on our checklist

Apart from a good interest rate, a good easy-access account used to be one with a guarantee to keep its interest rate the same as the Bank of England's Base Rate, or even one that guaranteed to beat the Base Rate by 0.5%.

Last year, however, the top savings rates started to climb further from the Base Rate. Now, the top savings interest rates are so high that it has destroyed the value of such guarantees. With the Base Rate at 3% and inflation at 4.5%, you're not going to be doing well if your provider decides to reduce your interest rate to 3% or 3.5%.

If any banks start offering better guarantees, such as the Base Rate +2%, we'll let you know. Till then, just be aware that an interest-rate guarantee will not necessarily guarantee a decent rate of interest.

Ensure your easy-access account actually is easy access

What remains on our checklist is that you should ensure the account is truly `easy access'. 'Easy access' means you can make withdrawals without penalties. Some banks market their accounts as easy access, but the small print states you can make limited withdrawals only, or that you lose interest in the months where you make withdrawals.

Ensure your savings are safe

We've always recommended that you don't put more savings in your account than is guaranteed by the Financial Services Compensation Scheme. (Currently, that is £50,000 per bank or banking group, or up to £100,000 for joint accounts.)

However, that may not be enough security for some of you. It would be sensible to split your savings into several accounts, even if you don't have more than £50,000.

If you're looking for a way to assess how risky a bank is, some commentators like to use CDSs. I'm not at all convinced by this measure. CDSs aren't regulated properly, nor are they priced in a consistent, mathematical way (which is part of the reason the credit crunch occurred).

A second reason is that if people get frightened and start a run on a bank, it doesn't matter how well run the bank is or how good its CDS score, it could still easily become yet another bank that needs saving by the Government.

Unfortunately, I think a better (but still far from fool-proof) measure of a bank's safety is if it has consistently had a low interest rate. This is an extreme solution that I shan't be taking myself, but if it gives you peace of mind it's worth it.

If a bank has boosted its rates a lot this year then it's probably been concerned about lack of funds. It might give you comfort to put several months' salary into one of the companies that are widely understood to be the safest. These are HSBC (which still has a reassuringly low 3.25% AER) and Nationwide.

More: First Payments Made To Icesave Customers | Five Ways To Protect Your Savings From Interest Rate Cuts | How To Save More.

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