Watch out for this savings swindle that could see your interest rate chopped by 95%...
The bonus culture is not just the preserve of slick, suited City bankers. And its sole impact on you and me is not just via the recession-causing culture of casino banking.
No, the bonus culture is alive and well in high street banking and if you’re a saver, it could be set to hit you in the pocket.
Unstable accounts
We’ve been reporting on the sly practice of using bonuses to beef up the interest rates on easy access savings accounts for a while now. And if new research from Which? is to be believed, these types of shady deals are on the up.
More than one in ten accounts now offers an interest rate with a bonus that will drop away after a year and leave you with a pitiful return. Compare this to the same figure ten years ago when only 3% of available accounts came packaged with bonuses and it becomes clear that this culture is on the rise.
Here are some of the worst bonus-fuelled accounts for an initial investment of £5,000:
|
Account |
Interest rate on £5K |
12 month bonus rate |
Revert-to rate |
% drop |
|
Post Office Instant Saver |
2.1% |
2% |
0.1% |
95% |
|
Lloyds TSB eSavings |
1.6% |
1.5% |
0.1% |
94% |
|
Lloyds TSB Easy Saver |
1.6% |
1.5% |
0.1% |
94% |
|
Halifax/BOS Web Saver RewardaHali |
2.8% |
2.55% |
0.25% |
91% |
|
Barclays Everyday Saver |
0.65% |
0.55% |
0.1% |
85% |
|
Santander eSaver Issue 3 |
3% |
2.5% |
0.5% |
83% |
Source: Which? Money
As you can see, the Post Office’s Instant Saver account has the largest bonus percentage with 2% of your overall 2.1% interest rate falling away after 12 months. That’s a staggering 95% drop!
Lloyds TSB aren’t much better, offering two accounts with rates that crumble by 94% after a year. While the percentage drop for Halifax and Bank of Scotland’s Web Saver Reward is slightly lower at 91%.
Getting the right savings account isn’t as easy as it seems, but by avoiding these four nasty catches you won’t go far wrong
And the grief for savers doesn’t end there.
Many banks do not even publish the current interest rate of an account on its statement, meaning that if you locked up your savings in an easy-access account over a year ago, your interest rate may have already been slashed – without you even realising it. That’s why it’s vital to stay on the ball and keep a note of the opening dates of all easy-access savings accounts, so that you’re fully clued up as to when any bonuses are due to fall away.
So how can you get round this savings swindle?
Keep on moving
The savings bonus culture may be an annoying trend in high street banking, but it can still be fairly easily side-stepped. An obvious way to do this is to just keep switching deals every 12 months.
Here are the best easy access savings accounts around at the moment:
|
Account |
Initial interest rate (gross) |
12 month bonus (gross) |
Revert-to rate (gross) |
Minimum investment |
Need to know |
|
3.10% |
1.10% |
2.00% |
£1 |
Four penalty free withdrawals each year |
|
|
3.01% |
1.51% |
1.50% |
£1,000 |
One penalty free withdrawal each year |
|
|
3.00% |
2.50% |
0.50% |
£1 |
Or monthly interest rate of 2.96% (inc. 2.50% bonus) |
|
|
2.96% |
2.46% |
0.50% |
£1 |
Unlimited withdrawals |
Yes, all of the above accounts do have bonuses tacked onto them, but if you want the best easy-access rate, you’re going to have to grin and bear a bonus. Coventry Building Society offers the market leading rate with 3.10% gross. And even after the 1.10% bonus has dropped off this deal you’ll still be left earning 2.00% - a lot better than some of the account's competitors.
[SPOTLIGHT]But be warned, this account is not 100% easy-access, as you’re only allowed four penalty-free withdrawals every year. Likewise, the Nationwide MySave Online account may offer a solid 3.01% (with an obligatory 1.51% bonus!), but you are only able to make one withdrawal each year without incurring a penalty.
It’s also worth pointing out that all of the accounts listed above have a variable element built into their interest rate. This means that your level of return could easily be altered at any point in the account's lifespan. For example, Santander’s eSaver account carries a variable interest rate and variable bonus rate, meaning that the Spanish bank could (in theory) slash your interest rate to next to nothing at any point.
But there is a way to secure a more consistent return on your nest-egg...
Fix it
If you’re after a more long-term rate for your savings, you’ll be better off steering clear of easy-access accounts altogether, and going for a fixed-term deal. These will guarantee you set-in-stone rates for a fixed period of time.
Here are some of the best fixed term accounts around at the moment...
|
Account |
Term |
Interest rate (AER) |
Minimum |
|
1 year (to 31.7.12) |
3.50% |
£1,000 |
|
|
1 year |
3.50% |
£1,000 |
|
|
2 years |
3.96% |
£500 |
|
|
2 years (to 18.7.13) |
3.75% |
£5,000 |
|
|
3 years |
4.21% |
£500 |
|
|
3 years |
3.70% |
£2,000 |
|
|
5 years |
4.65% |
£1 |
|
|
5 years |
4.60% |
£1 |
But remember, if you do plump for a fixed-rate deal you won’t be able to get at your savings for the duration of the bond's life without losing a large chunk of interest. This means that when the Bank of England does eventually up the Base Rate from its current historic low of 0.5%, you could see yourself stuck with a measly interest rate in a boosted savings market.
So with that in mind – when will the Base Rate change?
Well, if you can figure out a firm answer to that one, let me know! But you can read Ed Bowsher’s take on it by heading over to What’s going to happen to interest rates?
What do you think?
Are bonus-boosted accounts fair? Have you ever been caught out by a disintegrating interest rate?
Let us know using the comment box below.
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