Savers who stand still will suffer low returns

Good deals are out there, says Melanie Bien. So switch to them

It is so easy to obtain credit that many people consider it unnecessary to put money aside. Why bother scrimping and saving for months to afford a dream holiday, say, when you could simply buy it today on your plastic?

Easy access to consumer credit, coupled with rising house prices, means the savings ratio is at almost its lowest level in 40 years, according to research from the Halifax.

But the savings ratio - the portion of household income that is not consumed - has proved more resilient. Introduced in 1963, this statistical measure of our savings habits increased for the first 30 years before declining from 2000 onwards. It is just starting to rise again.

However, that tentative recovery is likely to be nipped in the bud if the Chancellor carries through his intention to reduce the amount we can save tax free in an individual savings account (ISA) from April 2006. The new limits imposed by Gordon Brown will be £5,000 in a stocks and shares maxi ISA and £1,000 in a mini cash ISA - down from £7,000 and £3,000 respectively.

With interest rates on savings accounts currently mediocre, despite the recent rise in the base rate, the tax breaks that come with an ISA are its big selling point. More than half of those who invest in an ISA do so because of this tax relief, according to research from Ample, the online share dealing service.

While we might not be saving enough, ISAs are the vehicle of choice when we do get round to it. Research from the internet bank Intelligent Finance (IF) reveals that 12.5 million ISAs were opened last year, and three-quarters of these were mini cash ISAs. But a £1,000 limit on the amount you can invest will make them far less attractive.

"If the Treasury wants more people to save for the future, especially for their retirement, they must boost tax relief, not cut it," warns Chris Bratchford, head of Ample.

But while today's beleaguered savers may be unhappy, they would have been far worse off in the 1970s. High inflation meant they enjoyed positive "real" returns for only two years during that decade. The worst year was 1975 when the real rate of return was minus 14.1 per cent, which meant savers actually lost money.

"Prolonged periods of low inflation hold the key to good real returns for savers," says Nick Robinson, head of savings at the Halifax. "We have always maintained that savers should be aware of not only the rate of interest paid on their savings account, but also whether the account they are in has been superseded by a better-paying account."

The choice available to savers has come a long way. Once, the only option was a building society savings account, and to get your hands on the cash, you would have to take a passbook to your local branch. Now you can also access your savings using the internet, telephone or post, so there is no excuse for sticking with a high-street bank paying paltry interest when you can just go online and secure a much better deal.

At the very least, your bank should have passed on the latest rate rise in full. If not, move to one that has. Some deals are so competitive, savers earn more than the base rate.

ING Direct raised its savings rate by 0.5 per cent (double the 0.25 per cent hike in the base rate), so customers earn 4.5 per cent annual equivalent rate (AER).

And IF is increasing the interest paid on its mini cash ISA from next month to 4.6 per cent on balances of £1. The rate is guaranteed to remain at least 0.3 per cent above base until 31 January next year.