Where to move your money when savings rates fall

Bank and building society deposits are still the most popular way of saving money. So when interest rates come down there can real hardship for millions of people. The tragedy is, the pain can be avoided.

As mortgage lending becomes ever more competitive, building societies are trimming their rates. It is the short-notice deposits that are bearing the brunt of the rate cuts announced recently - with around 0 5 per cent on average being lopped off.

It is possible to secure higher returns by agreeing to fix the amount you leave on deposit for a longer period, but it reduces flexibility. Typically, a building society taking money for, say, one year, will exact a penalty equivalent to three months' interest if you need the money early.

For those able to lock cash away, though, the additional interest can be useful. The Halifax building society, for example, will offer 6.9 per cent gross for sums of pounds 10,000 or more fixed for a period of one year, compared with 4.35 per cent gross available from the ordinary share account.

Another way of fixing your return is to buy UK government securities. Gilt-edged stock, or gilts, as these are known, are the promissory notes issued by the Government to fund public spending. Gilts are flexible but they do carry some risk. Unlike fixed-term building society deposits, you can buy and sell them in the stock market.

The price will fluctuate according to prevailinginterest rates. If interest rates go up, the price of gilts will fall, raising the return to buyers. Conversely, if interest rates fall, you make a capital profit. The shorter the life of a gilt (most gilts have a fixed redemption date) the less the risk of volatile movements. At present, for example, you can get 8 per cent gross from 8 per cent Treasury 2002/06

Alternatively you can consider guaranteed income bonds. These are issued by insurance companies and again tie your money up for a period of time. Among the highest yielding guaranteed income bonds at present are those offered by AIG, where the yields range from 6.1 per cent net of basic rate tax to 6.35 per cent for a five-year term, depending whether you deposit pounds 10,000 or pounds 50,000.

Then there are investment trust dividend preference shares. These also offer a predictable return (assuming the assets are sufficiently valuable) and have the advantage that they are tradable on the stockmarket. But like gilts they fluctuate in value according to prevailing interest rates.

Get professional advice. A high yield on a zero-dividend preference could mean that there is some doubt over the final redemption value. However, they are a share so any profit you make is treated as a capital gain, not income.

Currently the Fleming Income & Capital Zero Dividend Preference, which you can buy for 52p, will give you a gross yield of 8 per cent over the period to when they are redeemed in 2002 at a predicted 85.2p a share.

Putting money in any of these could prove a wise investment decision - if interest rates continue to fall. But interest rates do not move in a straight line.

Remember that short term rates have been as high as 15 per cent in this country recently, a level that would devastate the value of many of these investments.