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Forget ordinary savings accounts and pile any money into cash Isas while paying off as much debt as you can. This is the resounding advice from experts following last week's base rate cut.
The average interest earned on ordinary savings accounts is now on course to dip beneath 1% for the first time, with around 20% of instant access accounts paying a pitiful 0.1%, according to Moneynet.co.uk. The real returns after 20% savings tax (40% for higher earners) and inflation currently at 4.1%, will effectively leave millions of households with a return of zero on their accounts, or even in negative territory, effectively paying banks to look after their money.
Even those with cash in the highest-paying savings accounts could find they really earn nothing as banks and building societies are expected to adjust their rates downwards over the next week. Nationwide building society has already hit tens of thousands of savers for six, curbing rates across all its savings and banking accounts by an average 0.87 percentage points in the wake of December's rate cut and walloping customers in its popular e-savings account with a 1.1 percentage point cut - well over last month's 1 percentage-point cut - from 3.05% to 1.95%.
Anglo-Irish moved on Wednesday - ahead of this week's rate cut - to lop 0.4 percentage points off its one-year fixed rate bond to 4.6%. On Friday, it pulled its easy access and seven day notice accounts, paying 4.55% and 4.65% respectively, and is expected to launch new issues at lower rates next week. One of the best deals savers had been snapping up was a one-year fixed rate bond from ICICI, but its 5.1% rate has been cut to 4.65%.
"It's really brutal out there. Savers haven't seen anything like this and we really don't know how much further we have to fall," says Andrew Hagger of comparison site Moneynet.co.uk. "It's now getting to the point where it isn't worth saving in the short term. People will still build up their capital and put cash away, but you simply won't get any interest on it. And the problem is, that takes away the incentive to save."
Even though inflation is expected to fall quickly over the next few months to reflect the recently plummeting cost of oil, the impact of sinking savings rates will hit millions hard.
And as banks notch down their rates, usually in a staggered fashion across accounts, even switching for a greater variable-rate account in the short term could prove futile, says Michelle Slade at Moneyfacts. "There's a chance, in this kind of climate, that if you move to another variable-rate savings account, the institution could then cut its rates and leave you worse off than before. So wait and see how lenders react."
With tumbling rates on savings accounts, the new immediate emphasis for savers will be a move to finding the highest cash ISA rates or to pay down as much debt as possible, says Kevin Mountford of price comparison website Moneysupermarket.com.
"People now owe it to themselves to use that £3,600 cash ISA allowance as soon as possible for as high a fixed rate as possible because, beyond the headline rate on normal savings and regular savings accounts, both tax and inflation will damage your returns badly."
Manchester building society is offering a premier instant cash ISA paying 4% on a minimum balance of £1,000. This is one of the highest rates for an instant access cash ISA, although you can get slightly more elsewhere if you're prepared to fix the rate and lock your money away untouched: Nationwide currently offers a 4.25% three-year fixed-rate ISA bond.
"Although it doesn't amount to so much these days, £3,600 in an ISA paying 4% would see you save £28.80 as a basic rate tax payer or £57.60 as a higher rate tax payer - which is better than the current poke in the eye," says Moneynet's Hagger.
It's usually the case that more than three-quarters of cash ISA business is undertaken in March towards the end of the financial year, when savings institutions throw up their most competitive rates, but this year is likely to be very different, adds Mountford. "I don't think it's worth waiting [until then to pick a rate] as there won't be the same fierce competition for money with top rates."
In the absence of worthwhile saving rates, the circumstances also heavily favour bringing down as much of your debts as possible.
If you have mortgage rates at 5.5-6% and credit card debt at 16-18%, then it would pay you hugely to clear this debt because you're getting even less for your money, says Hagger.
"Say you have a credit card at 18% and you're earning barely 1% on your savings, then it'll benefit you to pay them down. Right now, the differential between savings rates and credit rates are huge, so it's worth doing."
The website Moneysavingexpert.com (MSE) calculates that it would be worthwhile to now use existing savings as well as any new savings to pay off your mortgage debt. Mortgage debt worth £10,000 at 6% will cost you £600 a year, while the same sum in savings earning 4% after tax - an almost impossibly high rate to secure today - brings you just £400.
The benefits will be even bigger on credit card debts. While £1,000 on a credit card at 18% will set you back £180 over the year, £1,000 in savings earning 4% after tax bags you just £40. So use your existing savings to pay off the debt and you'll be £140 better off.
Hagger says it is still worth keeping an emergency savings pot for your cash, ideally up to three months' salary, but any sum you can spare will be a start.
Offset mortgage customers - where your savings offset your home loan but earn no interest - are in a particularly strong position, Hagger adds, since they'll effectively be getting the mortgage rate (hopefully around 5-6%) as a de facto savings rate.
A word of caution, though: if you overpay too much into your mortgage, you could struggle if you lose your job or suffer a fall in income because the money can't usually be taken back. Overpay on a credit card, though, and - in a worst-case scenario - at least you can spend on it again.
For some of the highest rates left, you could consider regular savings accounts, says Hagger. Such accounts provide some of the highest rates around, with a handful still offering 5.31% or above, although this could swiftly change. The Barclays Monthly Saver, Norwich & Peterborough's Family Regular Saver and Principality building society's Regular Saver Bond issue 6 all offered 6%.
However, don't forget that regular saver accounts only pay the interest on the amount in the account at the time, and allow limited monthly payments to keep down payouts. If, for example, you saved the maximum £250 per month for 12 months in the Barclays Monthly Saver, you would earn a total of £77.62 in interest after basic rate tax - not £180 from 6% of the £3,000 saved.
What they pay out
6% Barclays Monthly Saver:
It's a regular saver so you can only invest up to £250 a month, and the interest rate earned only applies to the cash in the account each month.
5% Close Brothers bank Premium Gold account: You'll need at least £10,000 to open an account, be happy to lock it away for two years and move swiftly, too: the offer's only available until 13 January.
5% Abbey Monthly Saver:
You can invest up to £250 a month, and the rate drops to 0.1% for any month you make a withdrawal.
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