Page last updated at 15:16 GMT, Thursday, 5 March 2009
What low interest rates mean for you



By Ian Pollock
Personal finance reporter, BBC News

Three demonstrators outside the Bank of England
Three people complained about the rate cut outside the Bank of England

Even before the sixth consecutive cut in interest rates, many savers were being paid derisory rates on the money they held in ordinary bank and building society accounts.

The average variable rate for savers was already below 1%, with 67 instant access accounts paying 0.10% or less, along with 17 notice accounts.

Adrian Coles, director-general of the Building Societies Association (BSA), described the latest rate cut as a "kick in the teeth" for savers.

"It will be felt hardest by the many elderly people who have saved responsibly all their lives and are reliant on their savings interest to maintain an acceptable standard of living in retirement," he said.

So, are some savings accounts better than others?

Looking around

If you do some research you can in fact get an annual interest rate above 2%, from ordinary instant access accounts run by a small number of building societies, such as the Stroud & Swindon and the Chelsea.

Fixed rates for new savers might well drop in the next week or so
Darren Cook, Moneyfacts

And it is still possible to get an annual interest rate of 3% or more, if you look around and make some choices that involve putting your money away for a while.

The most obvious home for cash that is unlikely to be needed in an emergency is an Individual Savings Accounts (ISA).

These hugely popular savings vehicles allows you to put away up to 3,600 a year in cash, free of tax.

"It makes sense in the longer term to get your money into tax exempt savings plans as much as possible," said Tom McPhail of independent financial advisers Hargreaves Lansdown.

"The lower returns go, the more attractive that 20% instant tax uplift becomes," he said.

Fixed rate savings

Currently there are five banks or building societies offering you 3% or more on their ordinary cash ISA.

And if you want to plump for a fixed rate ISA, you can get between 3.2% and 3.35% a year if you are prepared to put your money away for between one and four years.

The best available deals can be seen on financial comparison websites such as Moneyfacts.

But Darren Cook of Moneyfacts said that some could change soon, now that another rate cut has come into play.

"Fixed rates for new savers might well drop in the next week or so," he warned.

Regular savings accounts, which require you to save a specific amount each month, also look attractive at the moment.

Four banks and building societies currently pay annual interest of 4% or more, with the current chart topper being Barclays bank at 5.84%.

Pay off debts?

An alternative way of looking at the effect of interest rate cuts is that for some people it makes it even more imperative to pay off their debts as soon as possible.

Be very careful about taking out further loans to pay off existing debts
Moira Haynes, Citizens Advice

If you have money languishing each month on a credit card it is still likely to be costing you more than 10% annual interest.

Paying that off - and avoiding running up any more credit card or other debt that is equally expensive - would have a much bigger effect on your finances than scrabbling around for an extra 1% return on modest savings.

And for those lumbered with large mortgages, the current situation offers a rare opportunity.

If you could afford the repayments you were being charged just six months ago, then you could consider continuing to pay at that monthly level now.

The overpayments will go towards reducing your mortgage, and if you do that for long enough it could knock several years off the term of your home loan, saving you many thousands of pounds in interest payments in the process.

However, before making overpayments, you should check with your mortgage provider to see that you can do so without incurring charges.

Prioritise

If you are in serious debt trouble, all this talk of coping with lower interest rates may seem academic.

Citizens Advice says people in this situation must first prioritise their debts - work out which ones must be paid such as a mortgage, rent or utility bills.

Then get advice on how much the priority and non-priority creditors should be offered if you simply cannot pay them all.

"Be very careful about taking out further loans to pay off existing debts," warned Moira Haynes of the charity Citizens Advice.

"You may end up paying back a lot more than you borrowed and the interest rates may be extremely high.

"Some loans can be secured against your home and you could end up losing it if you fail to make repayments," she added.



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