Although many savings accounts provide competitive rates of interest despite the low base rate, it is still virtually impossible for savers to beat inflation unless they consider alternative savings options.
However, many of these entail a level of risk, and so won't be suitable for everyone. Here, we take a look at some of the choices available to those trying to ensure their money works as hard as possible for them...
ISAs
One of the best ways to maximise returns is to make the most of your annual tax-free allowances. This year you can invest up to £5,340 in a cash ISA and the same amount in stocks and shares, or you can invest the full £10,680 allowance in stocks and shares only.
If you are happy to accept a level of risk in return for potentially higher returns over the long term, then a stocks and shares ISA may be the right choice for you.
When building an investment portfolio, you should ensure you diversify your investments between the four main asset classes - cash, fixed interest securities, property and equities - to help reduce the overall level of risk.
That way, if one of these asset classes performs particularly badly, your better performing assets can still help you meet your investment objectives.
If you haven't invested in stocks and shares before, you should seek professional independent financial advice to help you pick the right funds for your individual requirements and risk profile.
If you don't want to take any risks with your money, then you should stick with cash ISAs. Nationwide Building Society's Online ISA Issue 2, for example, pays an impressive 3.10% annual interest tax-free, but you need a hefty lump sum of £25,000 to qualify for this rate and you must already be a Nationwide customer. Deposits of £1,000 or more earn a lower rate of 2.75%, and the account accepts transfers from existing ISAs.
Alternatively, ING Direct pays a guaranteed rate of 3.00% for 12 months, again on a minimum investment of £1, but this account does not accept transfers from other providers.
For more information on ISAs, check out our ISA channel.
Index-linked bonds
Recent months have seen the launch of several new savings accounts that promise to beat inflation. Santander's Inflation-linked Savings Bond, for example, offers a return equivalent to 105% of the growth in the RPI over the five and-a-half year term of the bond.
Even if inflation does not rise over the term, investors will still receive an annual interest rate of 3.06% on their savings. This account is available until January 5 or earlier if sold out, to savers wanting to deposit a minimum of £500 for a five and-a-half year fixed term.
If inflation remains high, then these accounts offer an excellent way to ensure your savings will maintain their purchasing power. But, if, as many expect, inflation falls over the next few years, then you may only get back what you invested plus a lower fixed rate of return than you might have achieved elsewhere.
Another drawback is that you can't get access to your savings during the investment term, so you will need to be absolutely certain you can afford to tie up your money for three, five or six years, depending on which account you choose.
Structured products
Structured products combine capital protection with the opportunity to receive returns which are linked to the performance of the stock market, usually the FTSE 100 Index. They are generally more complicated than standard savings products and with some there is a risk you could get back less than you put in.
They are designed to be held for a fixed term, normally between three and six years, and there are a wide range of options to choose from, whether you are looking for income or growth.
As these products can be complicated, however, you should only consider investing if you fully understand how they work. For example, the Investec FTSE 100 3 Year Deposit Plan 30 Option 1 pays a fixed return of 19% provided the FTSE 100 is higher than its starting value at the end of the three-year term.
If the FTSE is lower, then you won't receive any growth and will only get your original investment back. You must hold the plan for the full three year term and the minimum amount you can invest is £1,500. The offer period for this plan closes on January 13, 2012.
Rather than following a stock market index, the Legal & General Inflation Protected Deposit Bond 1 will return any increase in inflation as measured by the Retail Prices Index with no upper limit or 17.5%, whichever is greater. You will also receive your capital back at the end of the five-year term. This plan can be opened with a minimum investment of £500.
You can find more details of these and other structured products on the savings channel.
Remember, if you don't fully understand any investment product, you shouldn't invest.
Easy access accounts
Wherever you decide to invest your savings, it is always sensible to hold some money in an easy access account. Experts advise trying to build up a nest egg of at least three months' salary in an easy access account so that you have some cash readily available in the event of an emergency.
Several accounts pays interest six or more times higher than the current Bank of England base rate. Nationwide Building Society's MySave Online Plus account, for example, pays 3.12% annual interest before tax on a minimum investment of £1,000, but you can only make one penalty-free withdrawal a year from this account.
Santander's eSaver Issue 4 account, meanwhile, pays 3.10% annual interest before tax on a minimum investment of £1 and you can make withdrawals whenever you want.
Bear in mind that this rate again includes a 2.60% bonus which is only payable for the first 12 months, so you will need to move your money once this disappears.
Alternatively, West Bromwich Building Society's WeBSave Plus 2 account pays an attractive 2.81% without a bonus. This account can be opened with a minimum investment of £1,000, but you can only make one penalty-free withdrawal a year.
For these and other easy access accounts, take a look at the easy access section of our savings channel.
Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct
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