Kevin Mountford, head of banking at Moneysupermarket.com, 22/04/2009 00:00

Savers receive Budget boost

The voice of disenchanted savers has been growing louder and louder in recent months as the impact of interest rate reductions bite. The Bank of England base rate has fallen from 5.0% to 0.5% since last October. In turn, savings rates have plummeted.

So it was promising to hear that the chancellor heeded the discontent that exists among savers and sought to address some of the problems they face by announcing an increase to the annual tax-free ISA allowance from £7,200 to £10,200.

However, the government needs to do more to encourage saving. A £3,000 increase in the ISA allowance is a step in the right direction, but the over-50s are the only ones who will benefit from it this year. Everyone else will have to wait until next April before they can put more into ISAs.

What's more, the amount that can be invested in cash ISAs is still limited to half the annual allowance: £5,100 for the over 50s, £3,600 for those under the age of 50. The remainder has to be invested in a stocks and shares ISA, but some people are reluctant to do this.

Why restrict the way individuals can invest their own money in this way? It would be fairer, and simpler, to allow people to invest the entire amount in a cash account if that's what they want to do.

Today's best deals on cash ISAs

More action needed
The government still has a lot to do if it wants to get the nation saving. Recent research from Moneysupermarket found 24% of people had no savings at all and more than a third had less in savings now than they did two years ago.

The government faces an uphill struggle to get us to save and this has been exacerbated by the economic turmoil and recent interest rate cuts.

Many of those who do save feel they're bearing the brunt of the financial crisis and are questioning the point of saving. Those who have borrowed are benefiting from low interest rates, while those who save are losing out.

What's more, the bank bail-outs and collapse of the Icelandic banks have shattered trust in the financial industry.

Leading savings rates
Although interest rates are at an historic low and are expected to remain low for the foreseeable future, the rates on the leading accounts are significantly higher.

With interest on cash ISAs being free of tax, this should be your first port of call if you're a taxpayer. The best accounts are paying more than of 3.0%: Barclays' Golden ISA is paying the highest rate at 3.61%, although this does include a one percentage point bonus for 12 months, so the rate will drop.

Fixed-rate bonds are also paying attractive rates and are worth considering if you have money you can afford to lock away. ICICI Bank's two-year HiSave fixed-rate account for example, is paying 4.20%.

However, if you go for a fixed-rate account, don't lock your money away for longer than two years.

Interest rates are about as low as they can go, so they will start rising again at some point. If you lock your money away for longer than a year or two, you risk being stuck with a rate that becomes uncompetitive.

If you would prefer an account that allows you to dip in and out of your savings, you need an easy access account. The leading deals are paying around 2.5%. ING Direct's savings account offers the highest rate at 3.0%.

However, the rates on most of the best easy access accounts include introductory bonuses, so watch out for these as you may need to move your money again in a year's time.

Poor