Wait for decent return goes on, savers warned

Savers have seen their funds eaten away by inflation as the Bank of England holds rates low

The long wait endured by savers desperate for better cash returns shows no sign of coming to an end despite new predictions of interest rate hikes this year, experts have warned.

It's now nearly two years since the Bank of England chopped interest rates to 0.5 per cent and with consumer price index (CPI) inflation running at 3.3 per cent, returns are being eroded by rising costs.

Pensioners on fixed incomes have been hit particularly hard by the loss of income from their savings.

Suggestions that interest rates could rise this year have provided a chink of light at the end of the tunnel, however.

Paul Fisher, executive director of markets at the Bank of England, recently said its policymakers wanted to increase interest rates to a "more normalised" rate of about 5 per cent as soon as possible.

And Brian Hilliard, chief UK economist at Societe Generale, yesterday claimed that interest rate rises over the next year could be the biggest since the Bank became independent in 1997.

But the current low savings rates obscure the fact that the banks and building societies are paying savers a record margin above interest rates, according to Kevin Mountford, head of banking and credit cards at Moneysupermarket.com.

He said: "Rates have been driven more by the need of banks to get retail deposits than by the interest rate environment."

This raises the prospect of savings rates going down rather than up when interest rates eventually rise, as providers narrow their margins.

Michelle Slade, savings expert at Moneyfacts, said: "It will be a while before savers see any improvement. Some providers will pass on any base rate rise, but not all. Savings margins won't stay this wide if rates rise significantly."

But Mountford estimated that some nine in 10 people with an easy access account could secure a better deal by being more proactive.

"Take advantage of the bonuses on offer, provided you're aware of when the rate drops, go for a fixed rate bond if you have money to lock away and, if you're a taxpayer, use your individual savings account allowance," he said.

Basic rate taxpayers need an interest rate of 4.2 per cent merely to keep pace with inflation, while higher rate taxpayers are looking for at least 5.5 per cent. It's some time since rates that high were available on traditional accounts, however.

The best savings deal currently available is the five-year fixed rate bond from Coventry Building Society, at 4.75 per cent.

The next best bet is a cash Isa, as no tax is payable on the interest earned. The best deal on the market is a 2.85 per cent offer from Santander, while Bank of Scotland has a 2.8 per cent rate (or 3 per cent for existing current account customers).

The top easy access savings account pays 2.75 per cent, courtesy of Mansfield Building Society.