The plunge in interest rates means older people relying on savings have seen a drastic cut in income.

Earlier this year, several accounts paid seven per cent-plus. A one-year AA bond, fixed at 7.02 per cent, was oversubscribed in days, as recently as September.

How generous that rate looks after the two hefty cuts sent Bank of England base rate plunging to two per cent. With many accounts paying less than one per cent after tax, and notice accounts and Cash-ISAs caught in the carnage, savers could struggle to earn £5 a year interest on £5,000 lump sums.

To confuse the picture, banks and building societies have yet to respond to the Bank’s latest cut – possibly to grab an extra slice of the savings cake from rivals.

Kevin Mountford at says: “Banks and building societies rely on a back book of accounts held by lazy customers who don’t realise rates are squeezed to pay the headline rates to attract ‘rate tarts’ who keep moving money.

“Obviously there’s a gulf between headline rate and average rate. Before the rate cut on December 3, savers earned an average 3.3 per cent gross.

“We calculate it is 2.47 per cent gross. The gap between this, and top accounts still paying six per cent, is widening.”

Mr Mountford thinks higher rates will suffer: “In a low rate environment, there’s a limit on how far providers can squeeze an existing savings book”, he says.

“Banks have a strong appetite for retail savings, but pressure on better-paying accounts puts a question mark over their survival. Lock into a fixed rate ISA now, instead of waiting until March to beat the tax deadline.”

Mountford likes Tesco’s Easy Access account paying six per cent on minimum £1 deposits – yet to respond to December’s cut. He also tips one-year fixed-rate ISAs from Nationwide (4.75 per cent, worth nearly seven per cent to higher rate taxpayers), Manchester BS, Birmingham Midshires and Kent Reliance BS (all 4.5 per cent).

Andrew Hagger at, also urges savers to act ahead of the Christmas shut-down.

“Act fast to lock in for 6-12 months”, he says, “and you can still get something fairly reasonable.”

Hagger tips 12-month bonds from ICICI Bank, at 5.75 per cent or 5.4 per cent for easier access. Leeds BS has a six-month Postal Bond fixed at five per cent until May 4, while Principality BS offers 4.94 per cent, also on a minimum £1,000, over a similar period. Among Cash ISAs, Hagger tips Egg (4.55 per cent on minimum £1), Manchester BS (4.5 per cent on £1,000), Kent Reliance BS (4.26 per cent on £1) and National Counties BS (4.21 per cent on £1). All these rates are variable, and could be falling early in 2009.

Andrew Hagger says: “Anybody who amassed a lump sum of £50,000 for retirement has seen their income drop by £100 per month. If rates decrease much more, savers will begin to wonder if saving is worth the bother.”

However, Michelle Slade at money points out: “Banks and building societies can’t afford to drive savers away, so the more competitive accounts won’t pass on the latest cut in full. The problem is that rates were easy to overlook when savers were doing well. Now they must look closely at what their money is earning, to avoid derisory rates.”

Colin Jackson, at Baronworth Financial Services, thinks rates are too low for many savers to accept.

“We may have to accept that the days of earning 4-6 per cent on cash without risk are over,” he says. “Clients must either accept ridiculous returns on money which is entirely safe – or accept a degree of risk in the hope of doing a bit better.”