The Perfect Savings Account

We reveal the five things to look for when choosing the perfect savings account.

Like many people, my savings are constantly on the move in search of a great rate.

Since 1998 my savings have wended their way through accounts from Cheltenham & Gloucester, Egg, Intelligent Finance, ING, Icesave and Sainsbury's. So, on average, I've only kept my money in an account for about two years before its rate has slipped to such a degree that I've decided it's worthwhile going elsewhere.

Of course, moving your money like this can be a hassle. First of all you have to find a new account and then go through all the money laundering hoops to open it. Finally, you have to transfer your money, during which time you'll lose a few days' interest.

Hopefully, this last problem will be reduced when the banks eventually get round to speeding up transfer payments. The current 3-day process was due to be replaced by November of this year but it was recently announced that the timetable had slipped a further six months.

Here's what I look for when searching for a new account:

1.       A high rate

While this obviously goes without saying, I'm always amazed at how many accounts pay less than the base rate. The top accounts at the moment are paying 6.3% AER. But a search for variable rate accounts without bonus rates revealed that from a choice of over 400 accounts, only 10% of them pay greater than the base rate (currently 5.75%).

Furthermore, half of them pay less than 3.9%. After basic rate tax, this means you're losing money in real terms as your rate of interest is less than inflation. Indeed, the account I had with Cheltenham & Gloucester all those years ago now offers a whisker over 4%, demonstrating just how far once competitive accounts can fall by the wayside.

2.       No strings attached

Normally, I like the word `bonus'. But not when it's in close proximity to the phrase `savings account'. Bonus rates are typically 0.5% or 0.75% and last for up to six months. Once they are taken out the equation, they turn a good account into a mediocre one. Thankfully, I've found that it's very rare for an account with a bonus rate to offer a significantly better rate than the best non-bonus accounts.

I'm happy to open a new account every once in a while, but every six months is a bit too frequent. Still, it will be interesting to see what impact the new transfer payment system has on the curse of the bonus rate. When it becomes easier to move money around without losing interest, it might become less profitable for banks to offer these incentives and rely on our apathy.

3.       No tiered rates

Tiered rates tick me off only slightly less than bonus rates. An account that combines the two is really taking the Michael. There is no real reason why tiered rates need to be applied to any account. Again, fortunately, it's rare for an account with this feature to be among the top payers.

4.       No withdrawal penalties

For a few years now, easy access accounts have ruled the roost and notice accounts have been a dying breed. But recently, we've seen a few accounts that offer good rates but contain the following depth charge in the small print -- no interest is paid in any month a withdrawal is made.

Yuk! For a high-paying account this translates into a loss of around 0.5% in interest for each month in which you make a withdrawal. So, even one withdrawal makes the interest rate unattractive.

5.       An interest rate guarantee

There has been one good trend in savings accounts recently and that is improving interest rate guarantees. Not long ago, most guarantees would last for just twelve months, and were rarely found among the top accounts.

These days, some banks are prepared to make promises that last until 2011. Indeed, most of the top accounts are actually offering a better rate than their guaranteed minimum. How long this differential will last remains to be seen.

> Choose from a range of savings accounts in The Fool's savings centre.
> When Saving Gets Sexy