One in three savings accounts offer 0.5% or less

As the UK officially enters a recession, it seems consumers are battening down the hatches and saving as much as possible with bank deposits increasing by £4 billion at the end of 2008. Unfortunately, new research from uSwitch.com reveals that although savers have topped up their ‘rainy day' funds, returns could be minimal with 35% of all savings accounts offering 0.5% AER or less in interest.

More alarmingly, 23 accounts are paying a miserly 0.05% AER or less which, on the average savings balance of £2,813, consumers can expect to earn just £1.41 a year in interest. This could become very confusing for savers as there are still current accounts available paying as much as 6.5% AER fixed for the next 12 months. This would deliver a return of around £163 a year on the same balance of £2,813, around 115 times higher than the lowest savings rates available.

The Bank of England recently announced that instant access savings accounts now offer an average return of 0.81%, the lowest level since November 2003. The research also shows that a total of 386 savings accounts currently offer interest rates of 0.81% AER or less. This ‘average' actually represents 41% of the total savings markets. In fact, across the entire savings industry just one in ten accounts offer 3.01% AER or more which is just in line with the current rate of inflation at 3.1%.

Louise Bond, Personal Finance Manager at uSwitch.com, comments: "Base rate decreases really do represent a double edged sword for consumers. Tracker mortgage customers are ‘quids in' but savers are being penalised. With more than one in three accounts offering returns of less than 0.5% AER, consumers really must keep an eye on their rates and switch to a better account if they need to. Savings rates will continue to drop in line with the base rate so it's unlikely the situation will improve in the next few months. However, there are still some reasonable deals around such as ING's Direct Savings Account paying 4% AER or, for those that can lock their money away, ICICI's HISAVE fixed rate savings account at 4.65% AER.

"While returns on savings accounts are so low, people may be tempted to look for other places to put their money as there are several options. This could involve dabbling on the stock market, offsetting savings against a mortgage or simply overpaying a mortgage. Before making any drastic moves or taking any big financial risks people should speak to a financial adviser to avoid a knee jerk reaction which could result in financial loss."