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For now, savers must make the best of a bad lot

With inflation running at 2.7% a year and salaries rising at just 1.7%, there is no end in sight to the financial misery – and that means it is more important than ever to make your savings work as hard as possible.

But when the average no-notice account pays a paltry 0.88% annual interest – worth 0.7% to a basic rate taxpayer – it is easier said than done.

Sylvia Waycot, of comparison site Moneyfacts.co.uk, said: "2013 is starting out as a dreadful year for savers, with little hope of change. Providers are not even pretending to offer competitive rates."

To match inflation, a basic rate taxpayer needs to earn 3.39% (worth 2.7% after 20% tax), while a 40% taxpayer would have to make 4.51%.

No easy-access accounts and only a handful of tax-free Isas (individual savings accounts) pay close to this – and, in most cases, you will need a balance in the tens of thousands of pounds to get it.

To receive First Direct's top Isa rate of 3%, for instance, you would have to transfer in at least £40,000 from previous years' Isas, while anyone who wants to earn 2.65% with Saga's two-year Fixed Rate Isa needs to put in £50,000.

But that doesn't mean you should forget about moving your cash to a better paying account.

Because of their tax-free status, if you haven't used your annual cash Isa allowance, one of these accounts should be your first port of call. There is a limit on the total that can be invested. For 2012-13, it is £5640, rising to £5760 for the tax year starting on April 6.

Isa providers paying more than 2% interest include Coventry Building Society (2.8% including a 0.6% introductory bonus), Metro Bank (2.35%, by post) Nationwide Building Society and Halifax (both 2.05%).

Once your Isa allowance is used up, put any additional savings into a market leading taxable savings account. Virgin Money's Easy Access eSaver, Nationwide's e-Savings Plus (Nationwide customers only) and Yorkshire Building Society's Triple Access Saver all pay 2%, worth 1.6% after basic rate tax.

If you don't know how much you are making in your current savings account, consumers' organisation Which? can help. Log on to Which.co.uk/savingsbooster and choose your bank or building society from a drop-down list. Find the account on a second list, and Which? will tell you what you are earning – and suggest where you could go to do better.

It's vital to read the small print before committing to a savings account. Many providers lure new customers by bulking up their interest rates with introductory bonuses, but if you leave your money after these expire, the amount you earn falls dramatically. For example, the Post Office's Instant Saver is advertised as paying 2.1%, but this includes a 2% bonus and after the first year the rate shrinks to just 0.1%.

Meanwhile, after the same period, the 2% paid by Nationwide Building Society's MySave Online Plus drops to 0.52%.

If you do opt for one of these accounts, make a note in your diary to move your cash elsewhere as soon as the bonus is paid.

Some accounts pay a slightly higher rate in exchange for tying up your money for a year or more, while others charge an interest penalty if you don't give the required notice before making a withdrawal.

Don't sign up for one of these unless you are sure you can stick to the terms and conditions.

CASE STUDY

Ann Moffat is saving for her son and daughter's weddings with a Scotwest 90-day notice account. The 51-year-old home support worker from Bellshill, Lanarkshire, chose it because she wanted a competitive return on her cash.Moffat said: "My husband's saving too and between us we're aiming to put away at least £300 a month. The money will be left until it's time for the weddings and, in the meantime, we know that it's safe and earning a good rate."

Credit unions pay an annual dividend based on their financial performance rather than interest. This year's proposed rate for Scotwest's 90-day account is 2%. Moffat added: "Because I work for the council, the money is taken directly from my wages, which makes it easy for me to save."

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