Savers warned as banks pull best-buy savings rates

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As several best buys are withdrawn, we explain how to ensure that you still get a decent return on your money.

Consumers are being urged to make the most of best-buy savings accounts after a number of banks and building societies withdrew market-leading offers amid fears that interest rates could plunge even lower.

Just 24 hours after Christine Lagarde, the head of the International Monetary Fund, suggested that the Bank of England consider reducing Bank Rate to zero if the economy did not recover, four leading savings accounts were withdrawn and replaced by lower-paying alternatives.

They included accounts from Tesco Bank and the Skipton and Manchester (Frankfurt: A0ETDJ - news) building societies. But these aren't the only institutions short-changing savers. In the past two weeks Nationwide Building Society, Virgin Money and AA Savings part of the Halifax have all trimmed rates paid on leading accounts.

Some of the most dramatic changes have been to fixed-rate accounts. Typically customers get a higher rate on their savings if they are prepared to lock their money away for one, three or five years.

The accepted view was that the Bank of England would not raise interest rates until next year at the earliest, with some hawks predicting that rates would stay at their current low of 0.5pc until 2016. But now that the prospect has been raised of rates being cut still further, it seems likely that the deals offered on one, three and five-year deals could soon fall. At present those who can afford to lock their money away for this length of time can get a reasonable deal on their savings. Despite the recent withdrawals from the market, the rates paid on fixed-rate bonds are marginally higher than a year ago, according to Moneyfacts.

Currently customers can get a rate of 3.6pc on a one-year bond from Cahoot. This rises to 4.1pc if you can tie your money up for three years and to 4.5pc if you take a five-year deal. In most cases you won't be able to access your money at all during this period; when access is allowed, those withdrawing funds will pay a hefty penalty in terms of reduced interest payments.

But Kevin Mountford of Moneysupermarket (Xetra: A0MW73 - news) .com said he expected to see rates paid on both fixed-rate and easy-access accounts come down.

"Banks need to attract retail deposits to meet improved regulatory demands, and effectively balance the books," he said. "Banks aren't making any margin on these accounts they are paying up to six times Bank Rate. But those institutions that need to attract deposits have to offer competitive deals."

As a result he said that if the leading providers did reduce rates, they were likely to be quickly followed by others in the market. Banks would still be losing money on such accounts, but not as much, and this could give them scope to cut the cost of their lending, on which they make their margins.

Ros Altmann, the director general of Saga, said such a move could prove disastrous for savers the majority of whom aren't getting a real return on their savings.

She (SNP: ^SHEY - news) said: "The pressure on rates still seems to be downward rather than upward, despite the fact that Bank Rate is almost zero and inflation remains well above the Bank of England's target."

As Ms Altmann pointed out, even the more generous fixed-term accounts don't pay a real return for higher earners, once tax and inflation have been taken into account. As a result, many "are losing the real value of their savings". The fact that interest rates could drop still further "is yet more terrible news for savers", Ms Altmann said. "But it has been obvious for some time that policy-makers don't care about the suffering of savers."

While a handful of accounts pay attractive headline rates, the reality is that the majority of savers are earning next to nothing on their savings, but could boost returns significantly by shifting their money to a better-paying account, even if rates do dip in the short term.

Simon Rose of the campaign group Save (Milan: SAVE.MI - news) our Savers said: "In the current climate savers must be proactive and seek out the best returns." This is even more important if banks do trim the rates on their best accounts. "By shopping around savers will help generate competition, forcing banks to increase rates. About 80pc of savings are with the big high street banks and over half of this money is in poorly paying accounts, in many cases earning a return of just 0.1pc," Mr Rose said.

But getting a better return on your savings doesn't mean plumping for the account that tops the best-buy tables.

As Mr Mountford pointed out, "the best rates aren't always the best deals". Banks and building societies now impose far more onerous terms and conditions on many of their accounts.

As has been highlighted by Your Money in recent weeks, one in three "instant access" accounts imposes restrictions on how often savers can withdraw funds: in some cases savers can find that virtually no interest is paid on their account because they made just one withdrawal.

In addition, the vast majority of these accounts have short-term bonus rates that disappear after a year, in many cases cutting rates to just 0.5pc. Similarly, watch out for accounts that purport to offer a high rate but allow savers to deposit only relatively small monthly sums, or require them to take out riskier investment products alongside.

Even those with fixed-term products should ensure they move their money promptly once the deals end, as most will earn negligible interest from this point. The longer you leave savings languishing, the more you negate the benefit of the higher interest paid over the fixed-rate period.

But campaigners want action by individuals matched by positive government measures particularly if the economy does worsen, prompting further rate cuts and more quantitative easing, fuelling inflation.

Mr Rose said: "We believe the Government should as it promised in Opposition remove income tax on savings income. With inflation at these levels, why should savers be paying tax when in real terms most of them are still losing money?"

Smaller measures could prove just as effective without necessarily costing the Exchequer significant sums. Ms Altmann said Saga had been calling for the Government to allow savers to receive more interest free of tax by relaxing the Isa rules, and perhaps by increasing the annual allowance.

She said: "Older savers are particularly disadvantaged as they can invest only half of their annual £10,680 allowance in cash. So someone in their seventies or eighties who has savings and does not want to gamble on the stock market cannot make the most of the full allowance."

Ms Altmann added: "This seems indefensible, as many of those holding stocks and shares Isas will be invested in overseas assets. Why would we want to give tax relief for people to put money overseas, rather than allow them to save in a UK-based bank or building society?"