Your Money: Don't hold back for an instant

Savers should not settle for the low interest rates available from instant-access accounts. Steve Lodge looks at the alternatives

THE announcement by Britannia building society that it will pay a "dividend" is something of a windfall to its 1.5 million-plus savers and borrowers (see story right). It may even prompt savers to open new accounts.

But it does not solve the wider problem of low interest rates on savings. This, in turn, is compounded by savers' inertia. Too many people keep more of their rainy-day money than they need to in traditional instant- access accounts. And these rates are now at historic lows. Typical interest is now down to less than 3 per cent gross on pounds 1,000, which after tax is even less than inflation.

Here are some tips for improving your returns:

q Switching societies altogether is something of a pain. Rules to stop money laundering now require proofs of address and identity to open accounts. It is also worth keeping pounds 100 with any society as a windfall stake.

However, figures published in this month's Which? show that switching can make a significant difference. Savers with pounds 2,500 would have earned pounds 304 more interest than average over the past five years by switching to the best instant access accounts.

q No society has a monopoly on the best savings rates forever, but some have better reputations. The Portman building society has made great play of offering consistently good rates relative to other societies, in particular for smaller savers. Currently, it pays 4.8 per cent gross on instant access balances as low as pounds 100 (details on 01202 292444).

q Consider postal or telephone-operated savings accounts. Some can even be operated by cashpoint machine, reducing the turnaround time for withdrawing money. These accounts pay higher rates because they are cheaper to run, and typically require pounds 1,000 or so.

The best rate on relatively low balances is currently from West Bromwich building society, which pays 6 per cent on pounds 2,000. A bonus of 2 per cent is also payable if you keep the account open until April next year. Make a withdrawal by phone on Monday and you can get your hands on the cash on Thursday (0345 374121).

This and postal accounts generally carry membership rights. West Bromwich is losing its chief executive shortly, which could create an opportunity for a takeover. A high street favourite for yielding a windfall, Bristol & West, also offers higher-paying phone-based savings accounts through its 24-hour Direct Savings service.

Direct Line, the telephone-based insurer, has just started offering a savings account, but this is paying a less competitive 4.6 per cent on deposits of pounds 1,000, rising to 5 per cent on balances over pounds 5,000.

q Notice accounts can offer higher rates in return for tying up your money for a period. Direct notice accounts offer the prospect of a double benefit. The Cheltenham & Gloucester, now owned by Lloyds Bank, is offering an attractive 6.5 per cent gross on investments of pounds 1,000 in its 30-day postal account, Direct 30. Withdrawals can be made either at 30 days' notice or instantly with a penalty of 30 days' interest (0800 717505).

q Tax-free Tessas can be worth considering even if you are not prepared to tie up money for the full five years. Our table shows the best rates currently available to those with maturing Tessas. You can take the net interest out of a Tessa during its five-year life - around 5 per cent currently - without risking its tax-free status. And while penalties for transferring your Tessa to another bank or society can be stiff (see table), penalties for closing tend to be less.

q If you can tie up money for five years or more, don't rule out PEPs. These mean investing in the Stock Market, so in the short term you may lose money. But over the longer term you stand to do better than from even the best savings account. Legal & General's UK Index Tracking PEP is the lowest cost available. Its minimum investment is pounds 3,000 (0800 116622).

TOP TESSAS

Provider Minimum Interest Transfer

investment rate interest

penalty

Northern Rock pounds 9,000 8.00% pounds 30

C&G pounds 9,000 7.75% pounds 30

Bath Building Society pounds 1 7.50% At discretion

West Bromwich BS pounds 3,000 7.35%* 180 days

Clydesdale Bank pounds 9,000 7.40%** pounds 30 plus

Bank of Ireland pounds 500 7.25%* 30 days+pounds 25

Royal Bank of Scotland pounds 9,000 6.75%* - 30 days plus

9.25%***

Table shows highest rates available to holders of maturing Tessas, open to all. It excludes exclusive deals for existing Tessa customers. *No subsequent additional investments allowed. **Rate exaggerates - interest is not compounded. ***Fixed rates increase by steps over five years - 9.25% only in year five. Source: Moneyfacts