Beware Of Accounts With Nasty Catches

Watch out for these high-interest savings accounts with a sting in the tail.

Finding a savings account with a decent interest rate is no mean feat these days. The financial crisis has not only crunched credit, but it has squeezed savings rates too. That said if you look hard enough (and with the help of websites like this), you'll see there's still one or two high-interest beauties on offer.

To earn the highest rates, you'll need to choose a fixed rate bond or, if you want to save monthly, a regular savings account. You won't be able to find an easy access account which pays more than a rather unimpressive 3.60% AER right now.

But the trouble is today's market-leading accounts often come with a sting in the tail. Let's take a look at some examples with very nasty catches:

Regular savers

The Abbey Super Fixed Rate Monthly Saver pays a fantastic fixed rate of 6.50% AER on your savings for the next 12 months. That compares pretty well with pre-credit crunch returns. The account is good for smaller savers too because it can be funded with just £20 a month up to a maximum deposit of £250.

In common with all regular saver accounts, access to your cash won't be easy. You'll only be able to make one withdrawal during the year. Once you have taken some money out, the interest rate drops to 6.43% AER on your whole balance for the month in which the withdrawal was made. Any money taken out after that will cause the rate to drop to a derisory 0.10%. And if you miss a payment one month, or you save less than the minimum of £20, you'll also earn just 0.10%.

But I don't think this is entirely unreasonable. After all, most monthly accounts require a commitment to keep saving regularly. As long as you play by the rules and pay in enough without taking out too much, the Abbey account looks like a good bet. So far, so good.

But there is one really huge drawback. To apply for this account, you'll also need to open a regular investment, pension or protection plan at the same time.

This means you'll either have to make a regular commitment to either Abbey's Portfolio Investment or Premium Investment products, which could involve exposure to the stock market. Alternatively, the Monthly Saver account can be opened in conjunction with a life insurance and/or critical illness cover policy available under Abbey's Personal Protection Plan. Or setting up an Abbey Stakeholder Pension will also do the trick.

But I think that makes savers jump through very high hoops just to earn 6.50% on regular savings for a year. Unless you're planning to take out one of these Abbey products anyway, I would suggest you steer clear.

Monthly Extra

And it's not just the market-leaders which have catches. The Monthly Extra Account from Chelsea Building Society pays a fixed interest rate of 4.50% in year one, 3.50% in year two and just 2.50% in year three.

But as well as putting at least £50 cash into the account every month, you'll also have to pay an equivalent amount into a collective investment fund managed by Norwich Union, meaning the minimum monthly payment in total is £100. The investment plan you take out with Norwich Union will may also involve the extra risk of investing in the stock market, or corporate bonds (company debt), which may not appeal you.

Fixed rate bonds

If you're looking for a fixed rate bond, you may be tempted by Alliance & Leicester's recently launched Super Saver account, which pays 5.50% AER fixed for a year. That's a pretty decent rate in today's market, but like Abbey's Fixed Rate Monthly Saver, you'll have to put an equivalent amount - or more - into any of A&L's investment products (offered by Santander Asset Management or Legal & General).

Again, this means to earn a reasonably high rate, you may have to take on more risk by investing in a stock market based investment plan.

What's more, if you withdraw any money from the savings bond, or you cancel the investment product you have chosen to run alongside, the interest rate will be reduced from 5.50% AER to just 2.08% AER.

That said, if you're looking to balance short-term security for your cash with longer-term growth potential, then a combination product like this might be right up your street. But, if all you're after is a straightforward savings account, you could try one of these alternatives:

Great accounts, no catches

For regular savings the Barclays Monthly Saver Account is a good choice. It pays a return of 6% AER on savings of £20 to £250 a month for the next year. Bear in mind you'll only earn 3.03% AER for any month in which you make withdrawal. But you won't need to take out any investment products at the same time.

If it's fixed rate savings you're interested in, try the ICICI Bank UK HiSave Fixed Rate Account which pays 4.30% AER fixed for a year on £1,000 plus. With this bond no access is permitted in the first year, but there's no requirement to buy any other products.

So make sure you check what you're getting yourself into before you apply for a savings account, and don't let those nasty catches trip you up.

More: Earn 6% On Your Spare Cash | Compare all sorts of savings accounts here