Beat low rates with these top savings accounts

Savings rates have been rubbish for months. But find out how you can still make the most of your spare cash.

It's been a disastrous couple of years for UK savers wanting to build-up a cash nest egg. In the wake of the credit crunch, March saw the Bank of England (BoE) base rate fall to an all-time low of 0.5%, where it's stayed ever since. Compare the situation to just 12 months ago, when interest rates were 5% and savers could find returns on easy-access accounts as high as 6.5%.

Following the collapse of Icelandic savings providers Icesave and Kaupthing Edge, the climate changed. BoE figures for February saw savings rates fall to an all-time low, with the average instant access account paying interest of just 0.17%, while returns on branch-based notice accounts fell to 0.18%.

When will things get better?

And the situation may not improve any time soon. Bank of England governor Mervyn King, last week hinted that rates could stay at their record low level until early 2010 due to inflationary pressures, while respected think-tank the Centre of Economic and Business Research (CEBR) predicts rates will stay at 0.5% until at least 2011, and won't reach 2% until 2014.

With many instant-access accounts currently paying as little as 0.1%, you could be forgiven for thinking it's not worth saving at all. Yet it's always worth building a nest-egg - particularly as inflation could still rise at a time when many people's earnings are likely to freeze. What's more, with a little guile you can still find a decent return. Find out how.

Exploit your tax-free allowance

The first port of call for savers is to make full use of their tax-free ISA (Individual Savings Account) allowance, which will immediately give you the equivalent of an interest rate uplift of 20% for a basic-rate tax payer or 40% for higher-rate tax payers. What's more, the amount you can squirrel away is rising; over-50s can now deposit £5,100 tax-free in a cash ISA during a single tax year, and the rest of us will be able to from April 6, 2010.

It may seem an obvious move but research shows that 17 million UK households don't use their cash ISA allowance - so make sure you use yours. The returns available aren't the highest - as the lower rates reflect the accounts' tax-free status - but you can still find a decent return.

Leading the best buy tables for instant access ISAs at the moment are the Barnsley Building Society Online ISA and ING Direct's Cash ISA.  The Barnsley deal pays a competitive 2.65% interest: the rate includes a bonus of 0.75% until December 21, 2010, and also rises to 3.04% AER on balances over £20,000. The ING account pays 2.50%, including a 1.47% gross p.a bonus fixed for 12 months from opening.

Both deals would yield around £500 interest for an over-50s saver depositing £425 each month over the course of a tax-year.

Keep your money on the move    

Another tactic to help protect your returns is to be flexible about where you invest. Check the rate you receive against those offered in the best-buy tables every other month to ensure you're getting the best return you can - and if you're not, be prepared to switch.  

The reason you need to do this is because many easy-access accounts include a sizeable bonus for the first 12 months, after which time the interest paid reverts to a more paltry rate. Don't fall for this trick: make a diary note to review the account when the bonus falls away, otherwise you could be getting a poor return on your cash.

Thus prepared, you should be ready to find the best easy-access deals. Bear in mind that most of the best deals can be found online, as the providers have lower overheads than high street banks and can afford to pass on slightly better rates.

Among the best-buys currently on the market are the Citi Flexible Saver, which pays 3.30% AER (includes bonus of 2.25% for 12 months) and the ING Direct Savings Account, which pays 3.20% AER (includes bonus of 2.70% for 12 months).

Lock some cash up 

To obtain the very best returns available from cash investments, either in savings accounts or ISAs, you'll have to keep your money locked-up in a fixed-term notice savings account or bond. Obviously, if the worst happens you will have to wait before you can access your funds - but you will have the peace of mind that your money is working hard on your behalf.

Among the best buys currently available are the Abbey two-year fixed-rate bond - the account pays an impressive 4.20% AER, but be aware that it requires a minimum deposit of £2,000 and your money will be tied up until November 1, 2011.

A more flexible alternative could be the Bradford & Bingley Online Notice Saver, which pays 3.30% AER on a minimum deposit of £1,000. You can access your money after 60-days notice but interest is only paid after one year and the rate includes a one-year bonus of 2.80% - so really, be prepared to lock up your money for one year.          

If those minimum deposit thresholds are beyond you, consider the Kent Reliance two-year fix, which pays 4.25% AER fixed and only requires a £100 to get started.

And finally...

Don't forget Government-backed National Savings & Investment (NS&I) products. In return for your investment, you'll receive 100% security on sums in excess of the £50,000 currently protected under FCSC regulations and deals offering solid guarantees. Tax-free Index-linked Savings Certificates promise to outpace RPI inflation over the investment term and provide a tax-free return, while NS&I Fixed Interest Savings Certificates promise guaranteed returns. In an uncertain world, they could become increasingly attractive.

Everyone should be saving a little. If you're having trouble finding spare cash, check out this How to...save when you've got no money video.

Compare savings accounts and ISAs at lovemoney.com

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