For now, savers must make the best of a bad lot

It’s vital to check interest rates and beware of one-year ‘bonus’ deals. By Alexandra Morgan

WITH inflation running at 2.7% a year and salaries rising at just 1.7%, there is no end in sight to the financial misery – and that means it is more important than ever to make your savings work as hard as possible.

But when the average no-notice account pays a paltry 0.88% annual interest – worth 0.7% to a basic rate taxpayer – it is easier said than done.

Sylvia Waycot, of comparison site Moneyfacts.co.uk, said: “2013 is starting out as a dreadful year for savers, with little hope of change. Providers are not even pretending to offer competitive rates.”

To match inflation, a basic rate taxpayer needs to earn 3.39% (worth 2.7% after 20% tax), while a 40% taxpayer would have to make 4.51%.

No easy-access accounts and only a handful of tax-free Isas (individual savings accounts) pay close to this – and, in most cases, you will need a balance in the tens of thousands of pounds to get it.

To receive First Direct’s top Isa rate of 3%, for instance, you would have to transfer in at least £40,000 from previous years’ Isas, while anyone who wants to earn 2.65% with Saga’s two-year Fixed Rate Isa needs to put in £50,000.

But that doesn’t mean you should forget about moving your cash to a better paying account.

Because of their tax-free status, if you haven’t used your annual cash Isa allowance, one of these accounts should be your first port of call. There is a limit on the total that can be invested. For 2012-13, it is £5640, rising to £5760 for the tax year starting on April 6.

Isa providers paying more than 2% interest include Coventry Building Society (2.8% including a 0.6% introductory bonus), Metro Bank (2.35%, by post) Nationwide Building Society and Halifax (both 2.05%).

Once your Isa allowance is used up, put any additional savings into a market leading taxable savings account. Virgin Money’s Easy Access eSaver, Nationwide’s e-Savings Plus (Nationwide customers only) and Yorkshire Building Society’s Triple Access Saver all pay 2%, worth 1.6% after basic rate tax.

If you don’t know how much you are making in your current savings account, consumers’ organisation Which? can help. Log on to Which. co. uk/ savingsbooster and choose your bank or building society from a drop-down list. Find the account on a second list, and Which? will tell you what you are earning – and suggest where you could go to do better.

IT’S vital to read the small print before committing to a savings account. Many providers lure new customers by bulking up their interest rates with introductory bonuses, but if you l eave your money after these expire, the amount you earn falls dramatically. For example, the Post Office’s Instant Saver is advertised as paying 2.1%, but this includes a 2% bonus and after the first year the rate shrinks to just 0.1%.

Meanwhile, after the same period, the 2% paid by Nationwide Building Society’s MySave Online Plus drops to 0.52%.

If you do opt for one of these accounts, make a note in your diary to move your cash elsewhere as soon as the bonus is paid.

Some accounts pay a slightly higher rate in exchange for tying up your money for a year or more, while others charge an interest penalty if you don’t give the required notice before making a withdrawal.

Don’t sign up for one of these unless you are sure you can stick to the terms and conditions.