Earn six times as much interest

Though the base rate is at a record low, here's a rock-solid way for smart savers to inflate their interest.

Nowadays, I know a lot about saving and savings accounts. But I was a late developer and only starting saving in my early thirties. Alas, my new-found savings habit coincided with the great credit boom of the Noughties.

When Britain stopped saving

Thanks an explosion of credit, Britain will remember the first decade of this century as ten years of borrowing and not saving. During the Nineties, the savings ratio (which measures the proportion of our take-home pay which we save) dropped from a high of 11.7% in 1992 to a low of 5.2% in 1999.

Sadly, during the Noughties, the savings ratio collapsed still further, as the following table shows:

Source: ONS

As you can see, the savings ratio declined to a low of just 1.7% in 2008 -- a year when we saved just one pound in every 59. This was the lowest savings ratio since 1959, when it stood at 1.5%.

The savings habit returns

The good news is that the savings ratio has been inching up over the past year, as my next table shows:

Source: ONS

So, we Brits have started saving harder, but savers have been dealt a heavy blow.

The base rate bombs

In early October 2008, the Bank of England's base rate was 5% a year. By March 2009, it had been slashed to an all-time low of 0.5%. This was the steepest fall in the base rate in history -- a drop of nine-tenths (90%) in six months.

Of course, the plummeting base rate proved to be an absolute disaster for savers, as banks and building societies rushed to slash their savings interest rates. This has hit millions very hard, particularly pensioners and older savers who rely on their savings interest to help with their living expenses.

Savings rates plummet

Recently, I was chatting to a lovemoney.com reader who is planning to retire next year. He and his wife are not risk-takers, so they steer clear of the stock market. Instead, they have built up a large pot of savings, making good use of cash ISAs. These super savings accounts pay tax-free interest, which is why over 19 million savers use them.

Understandably, this reader was very annoyed at the mess the UK is in. He thought that by saving sensibly and steering clear of debt, he would be in a good position come retirement. Alas, things have taken a turn for the worst, because the interest rates earned by his savings have plunged.

Like most savers, this reader couldn't tell me precisely the interest rates paid by his various ISAs and savings accounts. So, armed with a list of his accounts, I found out for him. Alas, I had some bad news, as much of his nest egg was earning a pathetic rate of interest. One five-figure sum was earning a mere 0.4 a year, which is lower than the base rate.

Time to hit the transfer trail

When I broke this news to my reader, he was not a happy bunny. First, he was very angry with himself for not keeping a closer eye on his savings rates. Second, he was livid with his bank for quietly slashing his rates close to zero. Unsurprisingly, my reader agrees with me that 'loyalty is for dogs'.

Hence, he's moving his savings stash to another provider -- one which will reward him with a decent rate of interest on his pot. However, he cannot simply close his cash ISAs, withdraw the cash and use it to open new ISAs elsewhere. Instead, his existing bank must transfer his ISA accounts to his new provider.

Using the lovemoney savings search, I discovered that savers prepared to tie up their ISA cash for five years can earn ultra-high rates. Not all ISA accounts accept transfers, but of those that do, five-year fixed rates are as high as 4.25% to 4.51% a year (tax free, of course).

However, my reader doesn't want to put his ISA cash in handcuffs, so he's opted to transfer his pot to the highest-paying no-notice account. Soon, he'll be earning a much more impressive 2.65% a year in Standard Life Bank's Cash ISA Direct Access. That's more than six times his current rate. So, all's well that ends well.

Finally, my advice to 'switch and save' is obviously not big news. Indeed, many of you will read this article, shrug your shoulders and say "big deal" But when was the last time you checked the rates on your savings accounts and actually did something about them? If you do nothing, then your savings will, too!

Start saving now

Learn how to kickstart your saving habit by adopting this goal: Build up your savings (you have register with lovemoney.com first, if you haven't already). It will help you figure out how to squeeze down your budget, build up an emergency savings pot, set yourself a savings target and avoid the nasty catches on some savings accounts.

So what are you waiting for? Adopt the savings goal now. Or hop over to Q&A to get some tips from other lovemoney.com readers on the best ways to save and the best savings accounts for your individual circumstances!

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