Something to interest savers

Mutually owned societies have put up their interest rates and the banks are fighting back, writes Nic Cicutti

At last, some good news for savers. Rates paid by banks and building societies finally began the slow climb upwards after almost 18 months at their present low levels.

Prompting the rise is a combination of the Bank of England's decision to push up base rates almost three weeks ago, plus the increased competition as several former building societies prepare to convert into banks.

Rivals who intend to remain mutually owned societies have been greedily eyeing the tens of billions of pounds tied up in low-paying accounts with Halifax, Alliance & Leicester and Woolwich. Many are hoping that now the free shares windfall is almost over, barring Norwich Union and the far smaller Northern Rock in the autumn, they can grab a slice of those deposits.

However, the wannabe banks are determined not to let societies grab back a slice of their funds without a fight, hence the daily announcements of savings rate increases from both sides.

Leading the way this week are West Bromwich and Nationwide building societies, which are to increase rates across the board by about 0.25 per cent, more in some accounts and for some savings bands. Leeds & Holbeck and Staffordshire are among the many smaller societies which are also improving returns to their members' savings.

Banks, however, responded this week by hiking up rates paid to their savers' accounts. Abbey National matched the societies over most of its product range, while Lloyds Bank followed suit. TSB, now part of the Lloyds group, increased the rates paid on its business accounts.

National Savings has also upped rates on its First Option Bond, a one- year fixed-rate deal, by 0.25 per cent.

Many of the deals on offer appear even more appealing when tied to fixed- rate investments. Derbyshire Building Society's 7.05 per cent gross rate, pegged for two years, is one of the more attractive rates on offer, beating even Coventry Building Society's 6.75 per cent gross over the same period. Coventry is offering a far more competitive 6.7 per cent gross rate fixed for one year.

At a time when rates are likely to rise steadily, if unspectacularly, in the coming months, the attractions of fixing are less obvious. It makes little sense to tie one's money for more than a year. Perhaps surprisingly, many instant access accounts now pay 6 per cent or more on minimum deposits as low as pounds 500.

One problem for savers is that financial institutions have mastered the art of grabbing short-term headlines by driving their rates up on one or two accounts likely to figure in the "best-buy" lists that feature in every newspaper's Money pages, including those of The Independent.

A few weeks' free publicity can help mop up tens of millions of pounds before rates begin their slow drop back down to average levels. For this reason, it pays to check regularly that one's savings are earning the highest rates available.

That said, Nationwide Building Society's InvestDirect postal savings account, which does not require any notice from savers, is offering a 6.4 per cent. This increases to 6.45 per cent above pounds 10,000, and 6.6 per cent for investments of pounds 100,000. Further increases are planned by Nationwide in the coming weeks.

Postal accounts can take several days before one's money comes through in the form of a cheque, which then has to be cleared. Thankfully, competition between supermarket chains means Sainsbury's Bank offers cashpoint access to your money while paying an extremely good 5.75 per cent gross.

Although several institutions are speeding up their transfers of cash, sensible investors may feel that a few days' wait before they can get hold of their money is a small price to pay for up to 1 per cent extra interest.