What's A Guarantee Worth?

More than ninety different savings accounts offer interest-rate guarantees. However, these don't necessarily promise you a good deal...

The Bank of England's base rate is at its highest level since April 2001 and currently stands at 5.75% a year. Furthermore, the global credit squeeze has pushed up the cost of borrowing and improved returns to savers. Hence, British savers are today enjoying some of the highest interest rates since the turn of the century.

Alas, picking the right savings account remains far from easy, as there are least four thousand different accounts from which to choose. What's more, as competition for savers' cash has intensified, providers are becoming more and more cunning at hiding away terms and conditions in the small print.

Therefore, when shopping around for a top savings account, be sure to look beyond the juicy headline rate to learn what lies beneath. For example, you may find that your account comes with strings attached, such as:

• 1)    An introductory bonus which last for, say, six to twelve months. Once this introductory offer ends, your interest rate can go from table-topping to ordinary overnight.
• 2)    Notice or access restrictions which limit the number of withdrawals you can make in a year.
• 3)    Interest penalties. One clever trick is to pay no interest on your entire balance in any month during which you make any withdrawals. In other words, taking out £5 could cost you a month's interest on your entire pot. Yuk!
• 4)    A rate guarantee which promises to keep your savings rate above a certain level for a specific period.

Today, I'd like to review the last of these terms: the interest-rate guarantee. A rate guarantee of any form may appear comforting, but some of these promises aren't worth very much at all.

According to Fool partner Moneyfacts, over ninety savings accounts have rate guarantees, and some provide extended guarantees over long periods of time. However, each guarantee is subtly different, so you need to take the time to figure them out. For example, here are five accounts which offer rate guarantees to savers:

So, what do these guarantees come to, assuming the base rate remains at its current level of 5.75%?

Coventry BS: your yearly interest rate won't fall below 6.50% in the first year and then won't fall below 5.75% until 30 June 2010.

Nottingham BS: At least 6.05% until 1 September 2008 and then at least 5.90% until 1 September 2009.

Chelsea BS: At least 6% until 15 October 2008 and then at least 5.75% until 15 October 2009.

Northern Rock: At least 6.31% in your first year and then at least 5.25% thereafter.

Saga: At least 6.3% for six months and 6.2% for the next six months, then 5.75% for a year and 5.5% in year three.

Although all five of these accounts currently pay at least 6.25% a year before tax, these rates all eventually drop back below 6% a year -- and even as low as 5.25%. Thus, you can see that there is very little guarantee with many rate promises. These guarantees certainly don't pledge to keep your account at the top table in the long run. Indeed, all you get is a minimum `collar' to which the rate can fall.

Finally, if you fancy a savings account which pays a high rate of interest and includes a rate guarantee, then here are two favourites among Fool readers:

More: Find ace accounts in our savings centre | Parents: Make 10% A Year! | Simple Savings, Great Rates!