Supermarket groups are turning up the pressure on banks and building societies by raising savings rates for new and existing customers, while their high street rivals continue to cut returns, according to savings experts.

Tesco and Sainsbury’s have increased the rates offered on their internet accounts in the past month. Over the same period, 27 bank and building society accounts have slashed returns, according to uSwitch.com.

“Traditional banks need to raise their game to compete with the supermarkets,” Pierre Williams, of MoneyExpert.com, says. “The time is right for supermarket banks to really shake up the market, with many of the traditional high street giants on their knees in the wake of the recession.”

The Tesco internet saver account pays 3 per cent, which includes a 1.75 per cent, year-long bonus for new savers. This month, Tesco has agreed to extend the 3 per cent rate for a second year for customers who have been banking with Tesco for a year. Without the extension, the rate would fall to 1.25 per cent for loyal customers.

Sainsbury’s Bank has raised the rate on its internet saver account by 0.2 percentage points to 3.2 per cent, on a minimum of £1,000 for new customers and anyone who has opened an account since its September 7 launch.However, only three withdrawals a year are allowed. Lloyds TSB has cut the rate on its monthly saver account by 3 per cent, Egg has cut its internet savings account bonus by 0.75 per cent and Bank of Scotland’s instant access savings account reward has fallen by 0.35 per cent.

The rate increases coincide with Tesco’s move into full service banking this month. Kevin Mountford, a savings expert with Moneysupermarket.com, says that the trend “can only help to provide the UK consumer with further meaningful options”. And last week Sainsbury’s launched a scheme rewarding shoppers who take out its easy saver account with double Nectar points. The same applies to Sainsbury’s home insurance, pet insurance and credit cards. Customers who have all four personal finance products get double points for each one, equivalent to 4 per cent off each shop or tank of petrol at Sainsbury’s.

Rumina Hassam, a savings expert at uSwitch.com, says: “The emergence of competitive deals from less traditional financial providers such as the Tesco Bank is fantastic news for consumers. In fact, the best-buy tables are pretty much monopolised by the building societies and other small providers so it will be interesting to see if and when the larger providers pick up their game.

She adds: “Providers do not have to contact you directly when they cut rates for existing customers, so returns could be miniscule and many are not even aware of it. Our advice to consumers is to act quickly, keep an eye on existing savings rates, and those that can afford to should fix.”

Instant access

Given that the average instant access account now pays only 0.15 per cent, Sainsbury’s easy saver account, with a 2.8 per cent interest rate on a minimum deposit of £1, is a good product.The account allows you to make up to five withdrawals a year, and the rate is guaranteed to be at least 2 per cent above the base rate for the next 12 months.

To pick up double Nectar points, customers must deposit at least £5,000 within 30 days of opening the account and maintain that for at least two years.

There are, however, even better deals available, with 11 easy access accounts that pay 3 per cent or more.

Citibank’s Flexible Saver Issue 6 is the market-leading, easy-access account at the moment, with a rate of 3.3 per cent, 0.1 per cent higher than Sainsbury’s internet saver account. This rate, however, does include a large variable bonus of 2.25 per cent, which drops after 12 months and is available only to new customers. A saver with £10,000 invested in an account paying 0.15 per cent would earn an extra £315 in gross interest over one year by switching to this account.

Bradford & Bingley’s notice-saver online account also has a rate of 3.3 per cent, but with an even bigger one-year bonus of 2.8 per cent. Customers are also required to give 60 days’ warning if they want access to their money. ING direct savings account, on the other hand, is genuinely instant access and has a competitive 3.2 per cent rate on a minimum £1 deposit, guaranteed for 12 months.

Last week, the AA launched a new account paying 3.15 per cent on balances up to £50,000. This increases to 3.3 per cent on balances above that. However, savers should bear in mind that unless it is a joint account, only £50,000 is fully guaranteed by the Financial Services Compensation Scheme should the business collapse.

Fixed rate bonds

About ten banks and building societies have introduced issue bonds at significantly less competitive rates than their withdrawn predecessors, says uSwitch.com. The company finds that the newly-launched bond rates are up to 0.55 per cent lower than the products they replace. Nationwide, for example, has cut the return on its fixedrate bond range by up to half a percentage point.

Ms Hassam warns: “Savers need to keep a close eye on providers who use the ‘withdrawal and replace’ tactic to introduce products with less competitive rates. In particular, rates on short-term one and two-year new issue bonds are becoming less competitive.”

If you are looking to squirrel away your savings, Yorkshire Building Society offers an impressive 5.3 per cent on deposits starting at £100. However, as it is a five-year bond, you won’t be able to withdraw your money until 2014. Similarly, Barnsley Building Society has a four-year online bond with a rate of 5 per cent, and a three-year online bond at 4.7 per cent.

Isa round-up

In advance of the increase in the cash Isa limits for over-50s that came into effect on October 1, Lloyds TSB, RBS, NatWest and Norwich and Peterborough Building Society all implemented rate cuts across their cash Isa ranges, by an average of 0.25 per cent according to research by comparison site uSwitch.com. The interest rate on Lloyds TSB’s one-year fixed-rate Isa, for example, has dropped from 3 per cent to 2 per cent.

For customers still looking to make the most of their Isa allowance, Chesham Building Society is offering the market-leading account. Its Cash Isa 180 has a rate of 3.25 per cent on a minimum investment of £500, including a 12-month bonus of 0.45 per cent. Customers are required to give 180 days notice to withdraw funds.

Manchester Building Society’s Premier Isa 35 Issue 1 has a rate of 3.01 per cent of balances of £1,000 or above, including a 0.7 per cent variable bonus, and a 35-day notice period. Newcastle Building Society’s Reward pays 3 per cent on £500 or above, with a 1 per cent 12-month bonus and a 120-day notice period.