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Bank and building society rates are at their lowest since 1939. Clifford German suggests some alternatives that could give a better return
Interest rates on the average bank and building society account have reached their lowest levels since 1939, according to the MoneyFacts database. Part of the blame must fall on building societies that are taking advantage of investors locked into their accounts while they wait for windfall profits and bonuses, but societies generally are keeping down rates for savers and borrowers in the hope of increasing their share of the mortgage market, while banks traditionally pay savers less than building societies do.

But investors dissatisfied with the minuscule rates of interest on bank and building society accounts do have alternatives. Fidelity Investments suggests cash unit trusts, which reinvest investors' cash in the London money markets where rates are substantially higher than on small retail deposits, or in gilt edged stock and bonds issued by local authorities which are close to maturity.

Fidelity's own MoneyBuilder Cash charges no inital fees or exit fees, the annual management charge is just 0.5 per cent, after which it currently offers 5.2 per cent gross on a minimum deposit of pounds 5,000, which is double the average building society rate.

Some of the specialised London banks also offer money market accounts on larger deposits, offering fixed rates from overnight up to five years. Cater Allen Bank - part of the London discount house group - currently pays 4.93 per cent gross on pounds 50,000 on deposit overnight. The rate rises on deposits for a week or longer, reaching 6.75 on three-year money. Interest is paid monthly.

Small businesses can also earn more off the high street. On a current account, allowing 150 transactions a quarter, Cater Allen Bank offers 3.75 per cent gross on credit balances of pounds 10,000, which is at least double the comparable rates at high street banks.

Mutual building societies are, however, working overtime to exploit their cost advantage over their rivals who are converting into banks.

At present the mutuals are paying around 0.25 per cent more to savers on comparable accounts, and the margin could rise as banks and building societies start to favour savers rather than borrowers, who currently get an advantage of around 0.5 per cent from mutual lenders.

But for many investors who like the security of a bank or building society, the future trend of interest rates is as important as current rates. Higher rates are available on longer-term money. West Bromwich Building Society has just launched a one-year bond which offers 6 per cent gross and a three-year bond which pays 7.25 per cent gross, both on a minimum investment of pounds 2,500.

But if base rates begin to rise within the next 12 months, shorter-term investors could have the last laugh. Sun Banking pays 5.25 per cent gross on pounds 1,000 for a month, 6 per cent for one-year money and 7.5 per cent for five years, but increases in base rates could make those longer rates less attractive.

In particular, many investors with variable-rate Tessa accounts which matured over the past six months who rolled them over into fixed-rate Tessas for the next five years - to obtain an extra 1-2 per cent interest - could find that they have made the wrong choice again.