Ten saving graces to protect you against tumbling rates

While mortgage borrowers are no doubt cheering last week's interest rate cut, it was grim news for those relying on income from their savings.

Rates are at their lowest level for 48 years, and the average instant access account is now paying an unbelievably miserly 0.31 per cent before tax, according to MoneyFacts magazine. This means the average household, which has £7,146 in an instant savings account, is earning just £22 gross a year.

So, when most people are still too nervous to move back into the stock market, and some economists are warning that investors will get better returns from savings rather than shares over the long term, what can you do to improve your income?

With the help of Tom McPhail of independent financial adviser Hargreaves Lansdown, Rachel Thrussell of MoneyFacts and Philippa Gee of Torquil Clark, Cash has drawn up a list of tips to increase the money coming into your pocket and make the most of your savings.

1. Keep an eye on the interest rate paid by your savings account, and move your money if it becomes uncompetitive. Thrussell says that most lenders will not reduce interest rates in response to the latest cut before the beginning of next month, but smaller ones may take even longer if they think there is likely to be a further cut. If possible, maximise your earnings by keeping your money in an internet-based account or cash Isa.

See the tables below for details on the best paying accounts this week. Ask your bank or building society for the Revenue form R85 to earn interest free of tax if you are a non-taxpayer. Consider fixed rate savings accounts to protect against further rate cuts. Some offer a monthly interest option, although the rate will probably be lower than for annual payment. The highest rate at present is on the Capital One Bank five year bond at 4.4 per cent for a minimum of £5,000 and the bank also has a bond at 4.3 per cent for £5,000 over four years. Coventry is paying 4.2 per cent on £1,000 until 31 October next year and Northern Rock is paying 4.15 per cent and 4.2 per cent on £500 until August 2005 and 2006 respectively.

2. People aged 50 or more can boost their income by investing in a stakeholder or personal pension and 'vesting', or drawing down on it immediately. As the Government gives tax relief at your marginal rate on pension savings, your income will immediately increase by at least 22 per cent (40 per cent if you are a higher rate taxpayer). However, you'll have to live about 18 years to get your money back. McPhail says that a basic rate taxpayer putting £2,808 into a stakeholder pension would benefit from tax relief of £792 (actually 28 per cent tax relief).

When vested in an annuity paying the same amount of income for the rest of your life, this would provide a 60-year-old non-smoking man with an income of £154 a year or woman with £141 a year. Standard Life and Legal & General are the specialists in this field. For help with the transaction, call Hargreaves Lansdown on 0800 1382121.

3. Shop around for an annuity if you are about to draw your pension as it can increase your income by up to 20 per cent for the rest of your life. You do not have to accept the one offered by your pension company, and in most cases you will do much better to refuse it. Any independent financial adviser should be able to check out annuity rates for you, but if you don't have one try Hargreaves Lansdown, Annuity Direct (020 7684 5000) or Annuity Bureau (020 7902 2300). If you or your family have a history of serious illness, ask for a specially underwritten annuity to get a better level of income.

4. Make sure you claim all credits and allowances for which you may be eligible. According to the Department of Work and Pensions, up to 25 per cent of potential claimants are missing out simply because they have not filled in the forms. These include: income support (payments of £54.65 to help with basic living expenses); minimum income guarantee (the equivalent of income support for those aged 60-plus) child tax credit (nine out of 10 families qualify even when they are earning up to £50,000 a year); housing benefit (for tenants on low incomes and savings of less than £16,000). Council tax benefit can cover the entire council tax bill, but up to 36 per cent of eligible people are not claiming; attendance allowance (available to people aged 65 or more) contributes to the extra costs of having a disability; and the pension credit, payable from 6 October and providing up to an extra £14.79 (£19.20 for couples) to people who are generating modest amounts of extra income from pensions or investments themselves. It will be payable to those with weekly income of less than £139 (£204 for couples) and more than the basic state pension - up to 5 million pensioners are expected to be eligible.

5. Earn tax-free income and take care of inflation by investing in index-linked National Savings certificates. The three-year term certificates are paying 0.45 per cent fixed plus inflation, while the five-year certificates pay 0.7 per cent fixed plus inflation (as deter mined by the prevailing rate on every anniversary of your investment). This might not sound a lot, but the current inflation rate is 3 per cent and the interest is tax-free. A basic rate taxpayer would have to earn about 4.6 per cent gross to produce the same amount of net interest. You can put up to £10,000 in index-linked certificates, investing through the Post Office or over the phone on 0500 500 000.

6. Get a current account that works for you, rather than against you. Changing accounts is no longer as terrible as it used to be and there are some cracking deals to be had. Accounts that do not charge fees and do not require a minimum balance but pay a decent rate of interest include: Cahoot, which pays up to 3.4 per cent gross; Intelligent Finance (0845 609 4343) 2.96 per cent gross; Smile 3 per cent gross. If your account is often in overdraft, you should consider Alliance & Leicester's Premier Current account (0500 959595), which requires £500 to be paid in every month but charges no interest on your overdraft in the first year.

7. Buy new income fund holdings through an Isa or transfer any existing income fund holdings into an equity Isa if they are not already protected from tax. The allowance is £3,000 if you have already taken out a cash mini Isa in the same tax year, or £7,000 if not. Gee of Torquil Clark recommends Newton Higher Income and Jupiter Income for those who want pure equity-based funds, and Gartmore Cautious Managed and Investec Cautious Managed for those who would like a mixture of equities and bonds. If you are confident about which fund you want, buy through a fund supermarket or discount broker such as www.fundsnetwork.co.uk, Torquil Clark on 0800 072 3186 or Hargreaves Lansdown on 0800 138 0456.

8. If your spouse pays a lower rate of tax than you, consider transferring investments and savings into his or her name. This won't increase the amount of income you earn, but will reduce the amount of tax you pay, so it has an equivalent effect.

9. Beware putting too much money into gilts and bonds. As the stock market has declined, investors have poured money into these assets, pushing their price up and yield down. Many investment experts believe the bond bubble may now be about to burst and last week bond fund manager James Foster of Isis warned that it was time to buy equities instead. Gee says: 'I would not discourage anyone who has no money in corporate bonds putting a little bit in this type of fund, but it's not a clever time to be investing a whole lot.'

10. Watch out for the lure of investments paying a yield that is out of kilter with the rest of the market - there may well be something fishy about it. Remember Barlow Clowes.