Savers seek fertile ground in the wilderness

As rates are cut, returns are drying up. Melanie Bien looks at accounts that can squeeze more interest out of a barren landscape

While most mortgage borrowers will have been de- lighted by the recent cut in interest rates, savers have a lot less reason to be cheerful.

While most mortgage borrowers will have been de- lighted by the recent cut in interest rates, savers have a lot less reason to be cheerful.

The Bank of England's decision to reduce the base rate by 0.25 per cent to 3.5 per cent on 10 July has resulted in many banks and building societies passing on the full rate cut to savers. Some have swung the axe even harder, with National Savings & Investments cutting its mini cash individual savings account (ISA) rate by 0.35 per cent to 3.45 per cent.

But while the outlook seems bleak, there are steps you can take to maximise the returns on your savings. It's worth finding out exactly how much interest you are earning after the recent cuts, and switching to one of the accounts mentioned below if it means you can get a higher rate. And if you haven't got any real savings yet, the best way to start setting money aside on a regular basis is to find an account that pays a competitive rate of interest.

Everyone should have a couple of thousand pounds put by for a rainy day, in case the boiler packs in or the car gives up the ghost. As these are emergency funds, the key requirement in choosing a savings account is that you can get your hands on the cash almost immediately. Locking it away in an account requiring notice is not an option, but that doesn't mean you have to resign yourself to not getting any return on your savings.

ING Direct Savings offers the best rate of interest, paying 4.3 per cent annual equivalent rate (AER) on balances as low as £1. The AER is interest calculated as if it were paid and compounded each year. For a basic-rate taxpayer, this works out at 3.38 per cent net per annum. Customers can open and manage their account over the telephone or internet, and no notice is required for withdrawals.

The account was only launched in May so there is no guarantee that such rates will be maintained, but ING says it is not a honeymoon offer and the interest rate will always be competitive.

Unsurprisingly, guaranteed savings rates tend to be lower. Halifax Web Saver, available only via the internet, pays 4 per cent AER and is guaranteed to be 0.5 per cent above the base rate until 31 December. Northern Rock's Tracker Online pays 4 per cent AER too, but this includes a six-month introductory bonus of 0.31 per cent. Northern Rock also offers a guarantee: annual interest will fall no more than 0.5 per cent below the base rate.

If you want to be able to withdraw your cash immediately from an ATM, rather than wait for an internet account to transfer the funds to your high street bank, the best deal is 3.15 per cent AER from Nationwide InvestDirect. You can take out up to £500 a day using a cashcard from any Link or Nationwide machine, and you can also pay in money via Nationwide ATMs or by sending a cheque.

Savings rates can be boosted if you get them tax-free, so a mini cash ISA should produce even better returns. Make sure you opt for an instant access ISA if you want to get hold of your cash in an emergency. Otherwise you can opt for one paying a higher rate that requires notice.

Kent Reliance Building Society offers the best rate - 4.2 per cent - on balances of £1 in its mini cash ISA, and you don't have to give notice of withdrawals. Safeway Bank also pays 4.2 per cent, on balances of £10; again, notice isn't required.

If you are prepared to tie your cash up for three years, you can get 4.3 per cent through Bradford & Bingley's ISA Capital Saver, although this isn't much more interest for such a long period. And the minimum investment is £500.

There are also a number of fixed-rate bonds available, but the rates aren't great considering that, again, you have to tie your money up for years. Last Friday, Nationwide launched a two-year fixed-rate bond paying 4.15 per cent interest on balances up to £100,000. If you think the base rate will come down further over the next two years, this offer might look attractive. But if rates increase, you'll be stuck with a pretty unimpressive deal.

Savers also need to be wary of any investment vehicles that don't guarantee their capital. It is easy to get caught out by these, as they offer higher rates of interest. But read the small print: many aren't savings accounts at all but invest in the stock market, so you might not get back your original investment.