Between the Lines: Mutuals' customers suffer from the banks' disastrous mistakes

THE "best buy" savings tables promoted by product comparison websites may now be rebranded as the "least bad buys", it has been suggested.

Such has been the destruction of cash savings, savers with conventional deposit accounts have been losing money since inflation reached a 14-month high of 3.5 per cent last month. There are fixed-rate Isas and bonds offering inflation-beating returns, but those needing regular income from their savings – including millions of pensioners – are stuck with savings rates that currently fall short of the official rate of inflation.

Basic-rate taxpayers need a return of 4.38 per cent just to match inflation, while those in the higher-rate tax bracket need to find deals paying 5.38 per cent. I say find, but the search will be in vain. The best bet is to take advantage of the tax-free status of Isas, although just a handful currently beat inflation.

Most savers, especially those in retirement, favour instant access accounts, and this is where the biggest erosion of cash is occurring. The average instant access account pays just 0.73 per cent, a rate that would effectively pay a record low of -2.3 per cent after inflation.

There are more than 260 instant access savings accounts for balances of 1,000 – and not one pays enough interest to offset the effects of inflation and tax. The best deal currently pays 3.15 per cent, courtesy of Coventry Building Society. Three regular savings accounts pay enough for basic-rate taxpayers to beat inflation, but for higher-rate taxpayers there are none.

Fixed rates are a solution for some savers, but they are little use for pensioners needing access to their funds. National Savings has index-linked certificates that guarantee above-inflation returns, but these require savings to be put away for three or five years. Likewise, the best fixed-rate bonds and Isas are only available on similar terms.

For some, there will be much to be gained from moving money into higher-risk assets, such as equities, corporate bonds and property.

For most people, squirrelling cash away for a rainy day, or relying on their savings to support their weekly income, this is not an option, however.

Inflation is likely to fall again sooner rather than later, but interest rates are unlikely to rise for at least another year. The loss of returns on savings accounts has been devastating for pensioners in particular, and the outlook remains bleak.

Little has been done to address the issue, partly because the short-term solutions are thin on the ground. A report from Moody's ratings agency on Monday offered a clue as to why. It highlighted the potential consequences for building societies in particular of being unable to attract more substantial savings on deposit.

It's easy to complain that lenders must do more to give savers the chance to secure some genuine returns, but building societies in particular have been forced to compete with one hand tied behind their backs.

Not only are the state-backed banks squeezing them in the savings market, but they face a significant increase in the Financial Services Compensation Scheme levy – to compensate savers in failed banks – and the regulator is forcing mutuals to boost their capital adequacy levels.

As a result, according to Moody's, some building societies could disappear as part of a new phase of consolidation, particularly when lenders next year begin repaying the 319 billion borrowed from the government under the special liquidity scheme and the credit guarantee scheme. Those that remain will be forced once more to impose tighter lending criteria and reduce the availability of credit.

So on one hand we have building societies desperate for deposits from savers, and savers desperate for returns that are not wiped out by inflation. It all comes back to the credit crunch. Building societies need deposits because wholesale funding has dried up and the government-backed banks are competing in the savings market for the same reason.

Add to that the news that the margins on credit card rates have reached a new all-time high, with all but those borrowers with the cleanest credit records frozen out, and you begin to wonder when and why we stopped talking about a credit crunch. The credit crunch – a term that broadly refers to the reduction in the availability of loans and credit and the consequences for other areas of banking and lending activity – is far from over.