The best home for your savings

With savings accounts getting more complicated and bonuses rife, we look at the top paying savings accounts for that hard-earned cash.

One question I'm regularly asked is where should we save our money? Which is the best savings account on the market?

But the problem is providers have now made accounts so complicated it's almost impossible to compare "like with like" - so there's no clear winner.

Bonus? No thanks!

Three years ago, I would never have recommended a savings account with a bonus. Bonuses artificially inflate rates and are usually short-lived, meaning that should you forget to move your cash, your savings will be left earning a pitiful rate.

Providers, of course, love them - slapping that short-lived gratuity onto a disappointing rate lets the account leapfrog its way into the best-buy tables. We're all seduced by the headline-grabbing figure and plough our hard-earned cash in - then forget about it and earn a pittance. And the bank's shareholders rub their hands together in glee.

Since the credit crunch struck, bonuses have become even more prevalent. Research carried out recently by Moneyfacts has revealed not only are bonuses alive and kicking, but, like Northern Rock's debts, they're getting bigger all the time.

Savings accounts with bonuses

Source: Moneyfacts

As you can see, in the last two years the percentage of variable rate accounts with a bonus has increased from 10.8% to 16.4%. And the bonuses themselves have nearly doubled - from 0.64% to 1.1%.

Best buys with 2.65% AER bonus?

So what's the situation now? Well, you'd be hard pressed to find a market leading account without a bonus.

Alliance & Leicester's Online Saver Issue 5 account and Birmingham Midshires' Telephone Extra account currently pay a table-topping rate of 3.15% AER, which includes a shocking bonus of 2.65%*.

Stash your cash here and this time next year it'll be earning a miserly 0.5%. Yikes!

Even stricter rules

What's more, providers are coming up with more and more fiendish hoops for us to jump through.

The new Nationwide BS Champion Saver account, for example, claims to make things simpler. It looks at the branch-based savings accounts of eight of the High Street banks (namely Barclays, HSBC, NatWest, Abbey, Royal Bank of Scotland, Halifax, Lloyds TSB and Northern Rock). It then picks the top five rates and pays account holders the average of these. Interesting idea.

What's more, it also pays (yes you've guessed it) a bonus - this time of 1.1% AER for 18 months (until 31 January 2011). At present the total rate payable is 2.8% AER.

It's a smart move by Nationwide. Savers wanting branch-based accounts will feel they no longer need to keep track of which bank currently pays the best rate as Nationwide will do it for them - and the rate isn't bad.

But you'll need £1,000 to open the account (if the balance falls below this you'll earn just 0.1% AER) and you'll need to give 60 days notice to get at your money. Ouch.

ING Direct, which caused such excitement when it arrived with its straight-talking savings accounts back in 2003, has floundered in recent years with disappointing rates.

But things may be changing, with the bank having recently launched a savings account with a 12 month guaranteed rate of 3% AER (after this, the account reverts to the variable rate, currently 0.5% AER). Yes, there's no "bonus" to speak of - but let's face it - 2.5% of the rate really is one.

What about existing ING customers?

However, ING's offer is for new customers only (existing customer earn just 0.5% AER).

The bank claims to offer special deals to its existing customers and I can confirm this is true, as I've just had a letter from them offering me 3.25% AER (including a fixed bonus of 2.21%) on any savings I deposit in my Websaver account from now until 17 January 2010.

It's not bad (why it's not offered to all existing customers I don't know) but I'd have to be prepared to move my money sharp-ish come January.

Non-UK bank

As a non-UK bank, ING deposits are covered by the Dutch compensation scheme, rather than the £50,000 protection offered by the FSCS.

As someone who was burnt by the collapse of Icesave, however, would I be prepared to let my cash leave UK shores again? Hmm.

Overall, however, it's certainly got to the point where even I've had to admit that the only way to earn a decent rate on your savings is to snap up an account with a bonus.

And which savings account should you choose?

So as you can see there is no obvious answer as to which is the best savings account. The best thing to do is take a bit of time and pinpoint exactly what you want.

For instant access, Alliance & Leicester, Birmingham Midshires and ING offer pretty good options. For a branch based account Nationwide's Champion Saver isn't bad if you can abide by its terms. And you can generally get a more lucrative rate if you're willing to tie your money up for longer - but make sure you can put up with the conditions.

Unfortunately, you're unlikely to find an account paying a decent rate that doesn't include a bonus. But that's fine - just play the provider at his own game. Make a note in your diary so you know when that bonus will run out and shift that cash to the current best buy then!

* For the Alliance & Leicester account the 2.65% bonus is for balances under £25,000 - whatever your balance, you are guaranteed a bonus of at least 1.65%.

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