Don't let inflation erode your savings

With the Bank of England interest rate at its lowest ever point of just 0.5%, finding a savings account that pays a decent rate is far from easy, so savers are finding it increasingly tough to get any modest returns on their savings.

Higher-rate tax payers were most recently hit as a result of the National Savings and Investment's withdrawing its tax-free index-linked certificates, as the previous deal was offering the equivalent taxable returns of around 10% - providing the current Retail Prices Index (RPI) rate remained at 5%, providing more than double the returns of any standard savings account on the market.

An NS&I spokesman recently said on BBC Radio 4's Money Box programme that it was unlikely another issue of index-linked certificate would be released during 2010, but he denied that NS&I had future plans for other issues to track the lower Consumer Prices Index (CPI) as opposed to the RPI.

The Bank of England base rate has failed to budge from its record low of 0.5% for over 16 months. One economic forecasting group said it is not expecting to see it rise until 2014 – which suggests that most savings accounts will continue to lose money in real terms based on RPI inflation.

Another option to boost returns on your savings is shares that offer high dividend yields. Those looking to invest small amounts have the opportunity to protect their returns from income tax with a stocks and shares ISA wrapper. However, as shares are not guaranteed to increase in value there are risks involved, so it's up to you to decide whether to invest.

If you already have savings accounts, check that you are getting a good rate by comparing the current savings deals. The rate at which you initially opened with may have seemed good at the time, but rates can fluctuate a lot over time. Also it's important to remember that savings accounts tend to offer introductory bonus rates that only run for 12 months, so after this period your rate can fall significantly.

Rates generally change with the Bank of England base rate, so once this begins to rise you should keep a close eye on the savings market to make sure your savings are always getting the best for you. If you find another account that pays better, simply switch account – it's a lot easier than you might think and banks are well prepared to make the switch over as smooth for you as possible.

For those of you that don't mind the thought of locking your cash away in order to benefit from the best rates around, consider fixed rate bonds. These accounts allow you to fix your rate for a fixed period of time (generally between 1 - 5 years). Leaving your funds untouched will not only allow you to make some nice returns, but it also provides more of an incentive to leave your money to grow.

If you find you need access to your funds in an emergency this can be done, but try your very best to avoid withdrawing any funds as you will lose some or all of the interest.

The highest paying fixed rate bond on the Which4U comparison website is the ICICI fixed rate bond, offering an impressive 4.75% on all funds from £1000. This account requires you to lock your savings away for 5 years, but if you're not ready to make that kind of commitment you can opt for a shorter term with a lower rate.

Although the UK economy is showing signs of recovery, you should still try to spread your savings around to ensure they are completely protected. This means that you should never invest more than £50,000 (the limit covered by the Financial Services Compensation Scheme) into a single bank or financial institution, and make sure you check that none of your proposed banks fall under the same financial umbrella, as you may find that your group chosen banks hold a single compensation limit.

If you really want to be clever about it you should stick to investing around £48,000 as this leaves room for any interest you expect to earn to also be covered by the scheme.