Savers looking to move their money into the best paying accounts have been advised to take a close look at the shelf life of top rates.
A growing number of variable-rate savings accounts are using bonuses to top up their standard rates. Bonus rates are only valid for a limited period – usually 12 months, but sometimes six – after which time the account reverts back to a lower and usually uncompetitive interest rate.
And while banks are required to inform customers if their standard savings rate is being reduced, they are under no obligation to inform customers when a bonus rate comes to an end.
Analysts said that banks and building societies remain very keen to attract funds from savers but are under pressure to reduce interest rates following the series of cuts made to the Bank of England base rate. As a result, many have opted to create accounts that can be advertised as offering high rates, but which rely heavily on a bonus.
Last week, amid countless stories of falling savings rates, ING Direct announced a new no-notice savings account offering 5 per cent (4.89 per cent gross), higher than any other easy access account and available only to new customers.
However, on closer inspection, it turned out that nearly half of this rate was made up of a bonus rate that would run out after 12 months. The standard rate that the account would then revert to was 2.73 per cent, far lower than other easy access savings rates available from competitors. The rate has now been withdrawn.
Offers that include a bonus are on the increase, and savers looking to earn the maximum interest possible on their deposits have been warned to keep their wits about them.
There are currently 73 variable rate accounts that pay a bonus, seven more than last year. But the biggest difference, according to Moneyfacts, the rates service, is the size of the bonus. Last year, the biggest bonus on offer was 1.24 per cent. Now it is 2.17 per cent.
This doesn’t mean that rates are going up, but that the proportion of the rate made up of a temporary bonus has risen. Consequently, when the bonus period is up, the fall in interest paid will be heavy.
ING Direct, Citibank and RBS all offer rates with a large bonus as a way to compete with other savings providers, hoping that savers will keep their money in the account even when the bonus rate has expired.
Investec Private Bank has identified the same trend in savings rates for large deposits. For balances of £25,000 or more, the average bonus has risen from 0.61 per cent to 0.83 per cent. Linda McBain, head of banking at Investec Private Bank, said savers needed to be aware of the size, longevity and conditions of such offers and be prepared to switch when they expire.
The best variable savings rates without a bonus are 4.55 per cent from the now nationalised Anglo Irish Bank and 4 per cent from Scarborough Building Society.
Savers with money in these accounts must be informed if the rate is altered by a significant amount compared with the Bank of England base rate, as long as they hold more than £250 in their accounts.
There are no hard and fast rules about when the savings provider has to make contact, but when they do, they must give details of other savings accounts and, more importantly, they cannot penalise customers who decide to remove all their money and switch to another account.
Be ready to switch
Stories of constant rate cuts in the easy access savings market shouldn’t put cash investors off the idea of moving their funds to the most competitive accounts, according to financial advisers.
“With all the changes going on in savings accounts, the constant lowering and withdrawal of top- paying accounts, I think some savers will be wondering if there’s any point in moving their money and whether they might as well stay where they are, but that’s not the case,” said Kevin Mountford, head of savings and current accounts at moneysupermarket.com, the comparison site.
The near daily withdrawals and repricings of savings products have left an increasingly large gap between the highest paying accounts and the average offer, making it more worthwhile than ever to find a good rate.
According to Moneyfacts, the price comparison site, the average instant access savings account pays just 1.35 per cent. But savers who put their money into ING Direct can get an interest rate of 4 per cent. Advisers caution that this includes a bonus, meaning that savers will need to make a note of the date at which the bonus expires and the account starts paying a lower rate.
But the difference between the current average and the highest-paying account of 2.65 percentage points is higher than a year ago, when it was 2.59 percentage points.
For savers with accounts paying as little as 0.1 per cent, it makes even more sense to switch. Many savers who have held their money in an account for a long time may find that their bank has whittled away at the interest rate without closing the account, leaving them with a negligible rate. With accounts still offering between 3.5 and 4 per cent, there is no need to accept such small returns.
