NAOMI CAINE

The interest rates payable on individual savings accounts have fallen to a record low, the Bank of England said this week.

Average cash Isa rates are now at just 1.43 per cent as providers continue to steer away from new tax-free offerings, In August 2012, the average was 2.79 per cent while in 2013 it was 2.37 per cent,

Two weeks ago, National Savings and Investments revealed it was cutting one of the best deals available. Its 1.5 per cent easy-access Isa will fall to 1.25 per cent from November, hitting nearly 500,000 savers.

Bu things could be looking up. Savings rates are starting to edge up, according to the latest data from Moneyfacts.co.uk.

Since the start of August, interest rates have increased on 155 accounts, compared to 31 rate cuts over the same period, prompting Moneyfacts to say “life is returning to the market”.

Savers have been stuck with rock bottom rates for several years. But over the past few weeks, several banks and building societies have upped the rates on a range of accounts. For example, Yorkshire building society is offering a 2.20per cent three-year bond, with a minimum opening balance of £1000.

But the newer, so-called challenger banks, such as Charter Savings, Shawbrook Bank, Paragon Bank and RCI Bank, are leading the competitive charge.

Paragon Bank is now offering a two-year bond fixed at 2.40per cent and a five-year bond at a fixed rate of 3.10per cent. RCI Bank UK has also recently come out with a three-year bond paying a fixed rate of 2.70per cent. However, savers should note that deposits with RCI Bank UK are not covered by the Financial Services Compensation Scheme. Instead they are protected by the French deposit guarantee scheme.

The average rate for a one-year fixed bond is currently 1.51per cent, up from 1.41per cent six-months ago. The average two-year fixed bond currently pays 1.81per cent, compared with 1.70per cent six-months ago.

Tom Adams, head of research at independent savings adviser Savingschampion.co.uk, says: “Up and coming challenger banks are leading the market, showing the more established names how it should be done.”

The challenger banks are also reviving the rates on notice accounts. Charter Savings Bank tops the tables with a rate of 2per cent on its 180-day notice account. Or there’s a120-day notice account from Paragon Bank that pays 1.96per cent.

The rates are about the same as the top one-year bonds. For example, Charter Savings Bank and Shawbrook Bank both pay 2.10per cent fixed for 18 months. Savers should therefore think hard before locking their money away for a year or more.

Charlotte Nelson at Moneyfacts says: “Notice accounts are a key focus for the challenger banks: the best 120-day notice account has increased from 1.85per cent a year ago to 1.96per cent today. So savers looking at rates need to consider whether it is worth fixing or opting for a deal with a little more flexibility.”

There has even been an uplift in the rates on easy access accounts. Tesco Bank has increased its rate for new customers from 1.35per cent to 1.60per cent. RCI Bank UK is paying 1.65per cent and ICICI Bank has just upped its rate from 1.54per cent to 1.64per cent.

The rate rises are encouraging, but there is still a long way to go. For example, the average one-year fixed rate bond pays 1.50per cent today, but in September 2011 the average was 2.79per cent. Many of the big banks and building societies are also cutting rates, even though the Bank of England base rate has not moved for several years.

Many savers stick with the same account, even if it pays a poor rate of interest: recent research from the Financial Conduct Authority shows that 80per cent of easy access accounts have not been switched in the last three years. And 174,000 people keep their savings at home under the mattress or in a shoe box, according to research by Charter Savings Bank.

Experts therefore urge savers to take advantage of any rate rises and switch savings accounts to get a better deal.

Ms Nelson says: “Savers may think that it is a hassle to switch and that there will be little to gain from moving, but with rates on the rise, better deals are out there.”

Tips for savers

You are liable for tax on the interest from savings accounts, so it’s a good idea to use up your tax-free Isa allowance before you open a standard savings account.

If you are a couple that wants to save, think about opening the account in the name of the person who pays the lowest rate of tax.

It might make more sense to pay off any debts before you start saving because the interest rate on the debts will probably be higher than the interest rate on the savings.

You can earn interest of up to 5per cent in some current accounts. However, terms and conditions apply and there is usually a maximum interest earning balance of about £2000.

Regular savings accounts pay high rates of interest. But you have to pay in a regular amount every month, usually for a year.

The top easy access accounts often include a bonus. Savers need to make a note of when the bonus expires as the interest rate will usually plummet.

The Financial Services Compensation Scheme guarantees savings deposits up to £85,000 in a bank or building society regulated in the UK. But the guarantee is falling to £75,000 in January.