The savings account that's better than the best

The account with the best savings rate isn't always the right one to go for - and that is the case today.

Higher savings rates often come with worse small print. I'm going to give you two different examples.

I'll show you why the highest-paying five-year savings account isn't the best and which accounts beat it. Then I'll show you why the highest-paying easy-access account also suffers unacceptable terms and conditions, and the accounts that do better. 

The account with the highest rate right now

The highest-paying account for new customers right now is Birmingham Midshires' 5 Year Fixed Rate Bond. This ties up your deposit of £1+ for five years, with a fixed rate of 4.65%. 

There are two problems with this account. Firstly, five years is a long time. The best savings rates always come with accounts that tie your money up for years. To be interested in such a deal, you've got to have other savings in easy-access accounts, so that you have money available for holidays, Christmases and emergencies. 

You need to have a specific goal in mind before tying your money up here for years, particularly since you can't expect to beat inflation. You might, but you shouldn't assume it. The bank deducts 20% of your interest automatically in taxes, and higher-rate payers declare yet more through their self assessments, so the odds aren't fabulous. 

The second, smaller gripe is that Birmingham Midshires' account is operated by post only, with no internet access. This is not a major flaw since you expect to leave your money alone here for years, but you might still want that convenience. 

Better alternatives to the highest-rate account

There's another five-year account that pays the same rate of 4.65%, although you must deposit at least £1,000. This is Vanquis Bank High Yield. This is an online account, but it still suffers the same issue of no access. 

However, anyone looking for five-year savings accounts who haven't used their ISA allowances this year should consider ISAs in the first instance. 

Take the Governor 5 Year Fixed Rate ISA, which pays 4.5%. This may be a lower rate than Birmingham Midshires', but it still pays much more to most of us, because no tax is due. This is a good example of why the top rate is often not the best. 

Top tip for long-term savings accounts

Generally-speaking, when tying in your money for a long time it's better to get an account that 's guaranteed to match inflation, even after taxes have been deducted. Guessing whether a fixed rate will ultimately beat inflation is next to impossible, but anyone with an account guaranteed to match inflation can rest assured their savings will maintain their value, which is something that most savers, over the long term, don't achieve. 

Sadly, at the moment, I don't believe there are any such accounts for taxpayers currently open to new applicants, but keep your eyes peeled: they've turned up every few months for the past few years. 

The easy-access account with the highest rate

At the other end of the spectrum we have easy-access accounts. The highest rate comes from Nationwide MySave Online Plus Issue 4, which pays 3.12% interest. Although you get easy access, like most such accounts, this interest rate is variable. 

The good news is that, on this occasion, you have access to the top-rate account online. With easy-access accounts, online access is not just a minor convenience, it's a major plus point. 

However, the account has major weaknesses compared to some lower-paying competitors:

- Its interest-rate guarantee is pathetic. The rate could drop as low as 1.58% inside the first 12 months.

 - The account isn't genuinely easy access, because you can only make one penalty-free withdrawal per year.

 - Another snag for some is you'll need to deposit £1,000+ 

Top tip for choosing easy-access accounts

Many savings accounts have “fixed savings bonuses”, which are frequently misunderstood. These are not bad! 

A fixed savings bonus for 12 months is merely a guarantee that the interest rate will not fall below that level for a year. Without the bonus, banks are able (and willing) to lower the rate as soon as they've attracted their target total deposits. Just beware that sometimes banks offer “variable bonuses”, which are useless. 

Better alternatives to the “top” easy-access account

Looking at Nationwide's closest competitors, many have the same problems. The first one that stands out though is the ING Direct Savings Account paying 2.9% variable. This is a drop of 0.2 percentage points, but in return you get a guarantee that the rate won't fall below 2.36% for 12 months. You can open an account with just £1. 

I prefer the Halifax Online Saver even more. It pays 2.8% (0.3 percentage points less than Nationwide), but it pays a guaranteed minimum of 2.7% for 12 months. This saves you worrying about interest-rate drops for a whole year, with the only reason to switch being if interest rates elsewhere suddenly shoot up. Again, you just need £1. 

Finally, you think about using your cash ISA allowance on an easy-access ISA, for the same reasons explained above. The best such ISA for new money, bearing in mind all factors and not just the interest rate, is the ING Direct Cash ISA, paying 3% on £1+, with online access and a guarantee not to fall below 1.96% for 12 months. 

So, whatever savings account you're interested in, remember to consider all these aspects, and not just the top rate. 

More: Compare savings accounts and ISAs through lovemoney.com | Three simple ideas to help you get richer