It's no time to be living off your savings

Savers


Elderly savers who rely on bank and building society interest to supplement their pensions feel hard done by.

Deposit rates have plunged after base rates, so that £5,000 deposited in a Halifax Instant Saver account now earns 2.8 per cent, compared with 6.5 per cent three years ago - a fall of 3.7 per cent.

Some financial institutions, including Abbey National, Cheltenham & Gloucester and the Woolwich, have stopped passing on the full base rate cuts to mortgage borrowers, enabling them to lessen the impact on savers. This, they say, is a fair solution for all.

Even with inflation down to 2.3 per cent, savers barely break even. If they transfer their money to the highest-yielding internet account, Abbey National's esaver, which is now paying, including an introductory bonus in the first six months, 5.35 per cent, they can earn a real (after inflation) gross return of 3.05 per cent - 2.44 per cent for a basic rate taxpayer or 1.83 per cent net for someone on the higher rate.

Sticking to a branch-based account such as the Halifax's Instant Saver quoted above, a basic rate taxpayer would get a real post-tax return of 0.4 per cent and a higher rate payer 0.3 per cent.

Be sure you earn the best rate by comparing your account to those featured in Databank on page 12, or visit the Moneyfacts website.

Credit cards


Most credit and store card companies have not passed on any of the seven interest rate cuts so far this year. These firms argue that the interest they charge is based on the financial risk they face from their clientele rather than the prevailing base rate.

This enables Barclaycard to charge a standard 17.9 per cent annual percentage rate (APR) from December, HSBC and NatWest 18.9 per cent APR and Lloyds TSB 19.9 per cent APR.

HSBC and NatWest have not changed their rates since September 2000, Bank of Scotland since April 2000, Bank of Ireland (GB) since 1995 and the Bank of Cyprus - once competitive but now one of the most expensive - since 1988.

Watch out, too, for affinity cards, which pay a very small proportion of the amount you spend to the charity named on the card. Those issued by the Co-operative Bank, which include Amnesty International, Greenpeace, Help the Aged, Oxfam, and Save the Children, charge 19.8 per cent.

Store cards are even more extortionate. Most charge between 25 and 30 per cent.

You don't have to put up with this usury: it's quick and simple to apply for a new credit card and transfer your existing balance. For the best buys see the credit cards in the winners section opposite. If you want to give money to charity, why not switch to a cheaper card and donate the money you save?

Mortgages


'Three years ago people were taking out loans fixed at 7 or 8 per cent for five years. They seemed good deals then, but those people are still locked in and will have been distraught to see rates coming down ever since,' says David Hollingworth at mortgage broker London & Country.

A homeowner who borrowed £100,000 at 7.5 per cent on an interest-only basis will be paying £625 a month, and could save £230 a month by switching to a loan fixed at 4.75 per cent for two years from the Coventry Building Society.

The catch is early redemption penalties. Most fixed rate loans charge if you repay them during the fixed period, and some have 'overhanging' penalties that extend beyond the fixed period by up to three years.

These often amount to 5 per cent of the amount you repay - and can wipe out any saving you would make with a cheaper loan.

London & Country's website has a calculator that can work out what new fixed interest rate you would need effectively to wipe out the cost of the penalties on your old mortgage. Alternatively the firm offers a free number-crunching service over the phone, on 0800 373 300.

Personal loans


Interest rates on loans of between £500 and £3,000 have not changed, but those on large personal loans have dropped by about 2 per cent in the last three years. Unfortunately rates for most per sonal loans are set at one level for the whole term. Anyone who took out a loan two or three years ago is probably paying 2 per cent more than those applying now.

Before switching loans, find out how yours is structured. Several lenders add the interest for the entire loan period to the amount you are borrowing at the outset. In the first few months - or years if yours is over a long term - your monthly payment is used to pay off interest rather than capital.

If you redeem your loan early to switch to a new lender you may find you have paid off none of the original sum; you may even owe more.

Worse, you may also be charged early-redemption fees. In these circumstances it's just not worth switching.

A few lenders spread the interest evenly over the loan period and charge early redemption penalties instead. Here you need to calculate whether the penalties outweigh the potential savings elsewhere. Ask your existing lender for a redemption cost, then get quotations for a similar loan. Online brokers such as Moneysupermarket.co.uk can calculate the prices of loans from hundreds of firms.