Avoid these scandalous savings accounts!

Why you should always steer clear of simple savings accounts which are combined with risky investment plans.

These days, savers are faced with a tricky dilemma - take a great rate but lock away your cash for years, or take a much lower rate, but have penalty-free access whenever you like. I'm not sure either choice is particularly appealing.

So, when Nationwide launched a new fixed rate bond which not only pays a market-leading return of 4%, but also ties your money up for just one year, I thought the super building society had ridden to the rescue of savers everywhere. Wonderful!

Too good to be true

But I'm afraid it's too good to be true. Nationwide's bond is available 'exclusively' (their words, not mine) to savers who also open a Legal & General guaranteed equity bond at the same time.

The bond is a six-year investment which is linked to the performance of the FTSE 100, Dow Jones EuroSTOXX 50 and S&P 500 indices. The maximum return is 50% of amount you invest in the bond if the stock markets do well. But, if the markets perform badly, you'll only get back your original capital.

Even if the return from these shares is impressive over the term, your return is still capped at 50% of your investment, which means Nationwide will greedily cream off any surplus.

Lehmans

If you're not too familiar with guaranteed equity bonds - which come under the umbrella of structured products - they have been the subject of some very bad press. Take a look at the beginning of the debacle in Ordinary people face big loss from Lehman collapse.

In simple terms, these bonds are marketed as 'guaranteed', but scandalously this doesn't necessarily mean your money is always safe. The guarantee isn't normally provided by the bond company but by a third party. If that third party goes bust - which is exactly what happened to Lehman Brothers - investors stand to lose all their money.

Worse still, these plans weren't covered by the financial services compensation scheme because the plan provider itself - NDF -  was still trading, even though Lehmans had gone into administration. Industry watchdog, the Financial Services Authority is now carrying out an investigation following a series of complaints to the Financial Ombudsman Service.

More bad news

As if that wasn't bad enough, more recently, structured products provider, Keydata has been forced into insolvency after selling products within tax-free wrappers which weren't actually eligible for tax-relief. The subsequent tax dispute has effectively caused the company to go bust, leaving many investors in limbo.

Obviously, these are extraordinary circumstances. I'm not suggesting the L&G bond could go down the same road. It is not likely to go bankrupt, for example. But I really don't like products which bandy about words such as 'guaranteed', 'capital protected' or 'secure' - when in fact they could potentially be anything but safe and secure.

Other issues

What's more, I'm not at all keen on products which combine easy-to-understand savings and complex investments into one plan. This exposes you to a range of different risks which you might not be fully aware of. I believe it's always best to keep things simple. A product should either be a low risk savings plan or a higher risk investment plan. It shouldn't be both.

These combi-products are often sold as the antidote to low savings rates on deposits. But since they should come with a much higher risk warning, I don't think they really provide an appropriate solution.

After all, if the indices are lower at the end of the term than the beginning, you'll get back nothing more from the bond than your original investment, which may also have been eroded by inflation by that time. And, unlike investing in shares directly, you won't even earn a return from the dividends.

And, worst of all, some capital protected bonds may even return less than your original deposit.

Nationwide are not alone

But Nationwide aren't the only ones to sell fixed rate savings alongside investments. Abbey, for example, offers the Super Bond (Issue 8) which pays a great fixed rate of 5.50% AER for a year. But, you'll also need to open one of their qualifying plans such as a Capital Guaranteed Investment or a pension. (This bond is also sold at Alliance & Leicester and Bradford & Bingley.)

So, don't forget, these competitive rates come with a very big catch, and one which I just don't think is worth it.

What should you do instead?

As I mentioned at the start of this article getting a decent return from an easy access savings account is trickier than it used to be. But the savings market does appear to be improving slowly. Here are my recommendations:

If you have £500 or more to put away, Skipton Building Society offers a guaranteed rate of 3.85% on its Online Limited Edition Fixed Rate Bond. True, your money will be locked away, but only until 28 February 2010.

On the other hand, if full access is your main priority, try Birmingham Midshires' new, market-leading Telephone Extra Account which pays 3.15% (which includes a bonus of 2.65% for the next year) with unlimited withdrawals.

Compare savings accounts at lovemoney.com

More: Make sure your money is safe | The best savings accounts for your emergency stash