Note to savers: Beat the banks at their own game as rates tumble

Why are account-holders' returns being slashed when the base rate hasn't moved in months? One thing is certain, loyalty no longer pays.

Bank of England base rates were left on hold again on Thursday and it's likely there will be no change this year. But when it comes to savings rates, the situation is more in flux. Banks are throwing attractive bonus-rate accounts at savers to draw in their business and are reaping free advertising from best-buy tables, but for every account that has its rate bumped up, two have their rates reduced. With one in 10 accounts cutting its return, savers need to keep on their toes to ensure their cash is working hard.

Research from financial information website Moneyfacts.co.uk has shown that 10 per cent of variable savings accounts have reduced the interest rate paid in the past six months. Last month alone, 3.9 per cent of variable accounts have had rate cuts, despite the base rate sticking firm at 0.5 per cent. According to the research, there are two types of rate cut, one where a bonus rate on an account is removed so new customers no longer benefit from a higher rate, and the other when the standard rate of interest is pushed down for all account holders. The worst offender for cutting both the bonus and the underlying rate is RBS, whose Royalties Saver account has dropped to paying 0.4 per cent on balances up to £10,000 from 1.5 per cent in May this year, after cutting a bonus rate of 1 per cent and reducing the underlying rate by 0.1 per cent. Among banks that reduce rates for all account holders, Citibank has cut its rates the most, chopping its Reward Saver 2 from 2.6 per cent in May 2009 to 1.83 per cent today, a difference of 0.77 per cent. "We have cut the rate on the Reward Saver," says Teresa Broughton, a Citibank spokeswoman, "as we are focusing on the new Citi Flexi Saver which is currently offering a return of six times base rate."

That's all well and good, but the new Flexi Saver is only open to new money, so existing customers have the option of switching accounts, or settling for a reduced return. "Banks are increasingly profiting from the inertia of their customers and relying on reluctance to switch to increase profit margins," says David Black from financial information provider Defaqto. "Loyalty simply no longer pays."

At the other end of the scale, some banks are only shaving a fraction of a percentage point off their rates. Halifax has reduced its Liquid Gold savings account, which was paying 0.1 per cent, to 0.05 per cent. This may be a decrease of only 0.05 percentage points, but as the rate was so low to start with, it's actually a reduction of 50 per cent on a saver's return. "Even some of the smaller cuts can really affect customers," says Michelle Slade of Moneyfacts.co.uk. "For accounts like the Liquid Gold from Halifax, there are millions of consumers whose already low rates have been slashed even further."

As the base rate has remained static for so long, many are questioning the fluctuations in savings rates on the market. "Typically, variable rate savings did follow the base rate before the crash," says Ms Slade. "If it dropped by 0.25 per cent then accounts followed." However, the post-crash reasoning behind rate fluctuations has changed. The most recent savings-rate cuts are linked to the introduction of a new FSA regulation obliging banks and building societies to inform customers 60 days in advance of disadvantageous rate moves in order to give them time to move their money. These directives came into force on 1 November and so right up to this date there was a general massaging down of rates while banks could still do it unannounced.

More broadly, rate cuts can be linked to the new emphasis on using savings to fund lending. "The banks and building societies are really keen on getting in retail funds," says Mr Black. "To raise cash cheaply, banks just need to launch a new account, only for new savers, to get an influx of new customers. They then pay the higher rate solely on the new money instead of raising rates across all savings products." If a bank wants to launch a new account, as in the case of Citibank's Reward Saver 2, it may choose to lower rates on existing accounts in order to offer a market leading rate on the new account.

Another factor is the wider economic situation. As inter-bank lending relaxes, banks can afford to cut rates as they simply don't need the same level of retail deposits to fund lending. "The banks have all been pretty cautious about lending to each other," says Ms Slade, "but now there's some confidence and they are willing to go back into the money markets to raise their finance."

However, it is no coincidence that low savings rates and high mortgage rates make for good profits, and this factor cannot be ignored when it comes to explaining savings-rates cuts. "It's basically about increasing margins and profitability and rebuilding balance sheets," says Mr Black.

Regardless of the motivation behind cuts, the outcome for consumers is the same and you need to be prepared to switch providers if you want a consistently good return. Each bank will set rates according to its situation and so whereas a few years ago most banks were in a similar position, today savers have to seek out the best rates. And if you are proactive you can play the bonus-rate game to your advantage, dumping an account as soon as the bonus ends and signing up to a new one. The key is not to get stuck with one bank. As Ms Slade says: "In most instances, loyal is not something you can really afford to be at the moment."