The savings accounts that are true best buys

We separate the wheat from the chaff to show you the very best savings accounts on the market.

In the last couple of weeks, I feel like I’ve been bombarded with announcements about new ‘best buy’ savings accounts. And in most cases, I couldn’t really see what the fuss was about, because there seemed to be better alternatives on the market.

It got me thinking about what ‘best buy’ really means, and why the term is bandied about so freely by providers. It’s a phrase that’s certain to get consumers interested in the product… but is it misleading?

I contacted the press office of a bank that’s currently marketing a savings account as having a ‘best buy’ interest rate. I was mystified, because I knew of at least two equivalent accounts which offered higher rates.

I was told that they labelled the account ‘best buy’ because it had recently appeared in several of the best buy tables put together by newspaper and financial websites.

Fair enough. However, my contact admitted that these tables each contained several accounts. So, rather than being the ‘best’, it might be fairer to describe it as ‘one of several accounts that are better than average’. Not quite as catchy.

Here, I’m going to try to separate the wheat from the chaff, and identify three savings accounts that I believe really are the best in their categories.

Instant access - my top pick

My favourite instant access savings account is the Online Saver from the Post Office. It pays a variable rate of 2.9% AER, including a fixed 1.25% bonus element lasting 12 months.

This is a truly easy access account: You can start saving from just £1, make unlimited deposits up to £2 million, and withdraw your money whenever you want, penalty-free.

Moreover, Post Office savings accounts are now covered by the full £50,000 Financial Services Compensation Scheme (as opposed to being protected by the Irish government, as was previously the case).

Just bear in mind that this account can only be operated online.

Is it the best rate around?

No - there is one instant access account that offers a higher rate of interest. The MySave Online Plus account from Nationwide offers a rate of 2.99% AER, including a fixed 1.45% bonus for 12 months.

So why didn’t I choose it?

Easy access accounts which aren’t easy to access are a bugbear of mine; and the MySave Online Plus account is pretty inflexible.

First, you need a minimum deposit of £1,000 to open it. And second, you can make just one penalty-free withdrawal a year. After that, your rate will drop to just 0.1% for each month you make a withdrawal.

Regular savings - my top pick

I’m not usually a fan of accounts that insist you have another, linked account to get the benefits. However, I’m going to make an exception.

The Regular Saver account from First Direct pays a whopping 8% AER - fixed for a year. You can deposit between £25 and £300 each month, and can operate it online or over the phone.

If you miss making a deposit, or make any withdrawals, you’ll be paid a measly 0.5% on all the money in the account.

The catch

However, most regular savings accounts are inflexible in this respect - and the 8% rate dwarfs the competition - so what’s the catch?

Well, it’s only available to customers who also have a First Direct 1st current account. Usually, this would make me head in the other direction. However, the 1st account has had consistently excellent reviews for customer service, and you’ll even get a £100 bonus when you take one out.

To decide whether this account combination will work for you, be sure to have a read of Earn 8% on your savings.

A no-strings alternative

If you decide this arrangement isn’t your thing, I think the best ‘no strings’ alternative on the regular savings market comes from Santander.

Its Fixed Rate Monthly Saver (Issue 12) pays 4% AER for 12 months. Several regular savings accounts now pay this rate, but most only do so for a year.

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You can save between £20 and £250 each month, and operate the account over the phone or in-branch.

Again, remember that this is not a flexible account: If one of your monthly deposits is less than £20, you’ll get 0.1% interest for that month. And if you pay in over £250 in any given month, your interest rate will drop to 0.1% for the rest of the account’s term.

One year bond - my top pick

At the moment, I would be reluctant to invest in a bond lasting longer than two years. With the economic situation as it is, I think there’s a strong chance savings rates will rise within that time, and the holders of longer-term bonds will miss out.

For the purposes of this article, I’m just going to focus on one year bonds. And in this category, the E-Bond issue 2 from Skipton Building Society takes gold medal position.

It pays the highest rate in its category: 3.15% AER, fixed for one year. You can save anything from £500 to £1 million, and the account can only be opened online.

And my runner-up is…

I would only really recommend choosing a different one year bond if you’re not comfortable with opening your account online. In that case, take a look at the Poppy Bond from Coventry Building Society.

This pays 3.11% AER - fixed until 31st December 2011 - and can be opened online, in-branch or over the phone. You can save between £500 and £250,000.

A benefit of this account is that it allows you to get that 3.11% interest rate for a little over a year, as long as you apply for it straight away.

And one month after the account has been withdrawn, Coventry Building Society will donate 0.1% of the total amount saved in the Poppy Bonds to the Poppy Appeal.

More: The ten most misleading savings accounts | Five steps to financial happiness