Your Money | Melanie Bien

Answer the SOS from your savings

Another Monetary Policy Committee meeting, another rate cut. Who'd have thought at the beginning of this year – when interest rates were 6 per cent – that they would be as low as 4 per cent by November? What's more, economists aren't ruling out further cuts in the coming months.

But while those with mortgages will be celebrating, savers will be wringing their hands in despair because yet again they lose out.

Although borrowers usually feel the impact of any Bank of England rate changes before savers, Virgin Direct, which was quick to cut its mortgage rate by 0.5 per cent, also passed on the 0.5 per cent reduction to deposit account holders and those with mini cash individual savings accounts (ISAs).

This leaves those savers with a payable rate of just 3.5 per cent gross. And you can bet that it won't be long before other banks and building societies follow suit.

Abbey National and Cheltenham & Gloucester tried to reduce the blow to savers by cutting mortgage rates by 0.4 per cent rather than the full 0.5 per cent. But it remains a tough environment for income seekers, and the situation is unlikely to improve in the near future.

So what are your options if you need income from your savings? Only rainy-day money should be held in instant access savings accounts since these pay such poor rates of interest. Steer clear of the high street and opt for an internet savings account if you can. From Tuesday, for example, Intelligent Finance is paying 4.55 per cent gross interest on balances of £1.

A mini cash ISA is your next port of call because most of these accounts allow you to get your hands on your money without penalty. Returns are tax-free and you and your partner can each invest up to £3,000 each tax year. Smile pays 4.75 per cent on balances of £1.

Fixed-income investments such as bonds and gilts often become popular when times are hard, but returns aren't as good as they have been because of low interest rates.

Another alternative is guaranteed income bonds, issued by life assurance companies and paying interest net of basic-rate tax. But these don't suit non-taxpayers because they can't claim the tax back.

Another problem with guaranteed income bonds, which tend to guarantee your income but not your capital. Corporate bonds – which are issued by companies as a means of raising finance – are a better option than National Savings certificates, which aren't offering competitive rates of interest.

A corporate bond fund is an even better option as it reduces risk by allowing you to invest in a wide spread of gilts and corporate bonds. Some of these are riskier than others, but as with individual corporate bonds, the higher the return, the more risk you are taking on.

As ever, the answer is to shop around. It might be time consuming but you need to give your savings all the help they can get.

m.bien@independent.co.uk