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Beyond the headline rates
By Sam Barrett
Savings accounts are one of the simplest financial products around, but comparing them can be far from straightforward. Bonuses, penalties and conditions can make a simple comparison of headline interest rates deceptive. Bonus rates probably cause the most confusion. A huge introductory bonus can make even the weediest account look attractive. As a result, some financial comparison services have taken to showing them separately.
These short-term rates may be offered on both instant access and notice accounts as well as ISAs. They can increase the interest paid by up to 1%. Bonus qualification periods typically run for up to 12 months, although some have a fixed bonus qualification date.
According to Moneyfacts, the best rate on an account with an introductory bonus comes from Scarborough Building Society. It pays a variable rate of 6.40% gross, of which 0.65% is a bonus over a 12-month period. Asda isn't far behind, offering a rate of 6.35% on its internet savings account. This includes a bonus of 0.6% for 12 months.
Tiered bonuses are also being offered, creating even more confusion among investors about what their money is actually earning. Two accounts paying a headline rate of 6.35% gross also appear in Moneyfacts' top five bonus accounts. The first, Stroud & Swindon Building Society's Branch Premier Issue 2, includes a bonus of 0.6% until the end of 2009 and a further bonus of 0.3% in 2010.
If interest rates don't change, this means it pays 6.35% until the end of 2009, when the rate drops to 6.05%. It falls again at the beginning of 2011 to 5.75%. Its rate-matched rival, Scarborough Building Society's Click and Save Notice Issue 3, has a 1% bonus until the end of October 2008, followed by a 0.50% bonus for a further year. Subsequently, it will pay 5.85% from November 2008, and this will drop to 5.35% in November 2009.
Although the two products have the same headline rate, because the Stroud & Swindon account pays a higher amount for longer, it would earn you more interest.
Confusion
These bonuses can confuse people looking for a home for their savings, and they have been criticised as being nothing more than a marketing scam to ensure that a savings account appears at the top of best-buy tables. However, these accounts shouldn't necessarily be avoided. If you're prepared to keep one eye on the calendar and switch your money at the end of the bonus period, they can be a good option.
Indeed, given that the best rate for a standard instant access account is 6.30%, from Anglo Irish Bank, Icesave, the AA and Bradford & Bingley, and that you would need to accept a notice period of at least seven days to match the 6.35% on offer, it might be worth considering a bonus account if you're happy to move your money at the end of the bonus qualification period.
Even if you don't want to move it, with the bonus removed, the table-topping Scarborough account's rate of 5.75% gross is still reasonably competitive.
Small print
It's not just bonuses that can leave savers scratching their heads. Savings accounts can be so littered with small print that it's difficult to tell exactly what you can and cannot do with an account. Some terms and conditions are fairly acceptable. For example, it's reasonable to expect some form of penalty if you withdraw money early from a notice account or term-based product. Often, you'll lose interest
equivalent to the length of the notice period.
Likewise, it's hardly surprising that a regular savings account expects you to commit tomaking a regular deposit. For example, on its table-topping Special Saver and Christmas Saver accounts, which are term-based products, Skipton Building Society expects savers to close their account if they want early access to their money. However, there are plenty of other accounts that impose penalties if you flout the rules. Penalties for Chesham Building Society's Save Direct 2nd Issue, which has a £100 minimum; and NatWest's Savings Direct, which has a £250 minimum. Some accounts have other ways of sucking you in. In the fight for current account business a number of savings accounts have popped up promising double-digit growth.
A prime example of this is Alliance & Leicester's Premier Regular Saver account. This is linked to its Premier Current account and pays a hefty 12% gross for a monthly deposit of between £10 and £250. The catch? To get your hands on this rate you'll need to open a current account with the bank, which might be more hassle than it's worth. The bank will even bump its Premier Regular Saver rate up to 14% gross if you take out a protection product, such as life assurance or critical illness cover.
Cash ISAs
Although you won't need to pay any tax on cash individual savings accounts (ISAs), they can still harbour some fairly unpleasant surprises. As well as having to study introductory bonus and withdrawal conditions, you can find yourself having to stump up cash if you decide your provider isn't competitive enough. Transfer penalties are in place on around 40% of cash ISAs to help providers hang on
to their customers.
These penalties range from loss of interest to fees if you choose to move to another ISA. At the less punitive end of the scale, you'd lose 10 days of interest if you left National Counties Building Society and 14 days for leaving Newcastle Building Society's 14-day notice ISA. There are stiffer interest penalties with some of the term-based ISAs.
You could lose up to 180 days of interest on products from Alliance & Leicester, Principality Building Society and Wesleyan Bank. Unless you've built up a sizeable balance, penalty fees are likely to hurt even more. Northern Ireland's First Trust Bank and Teachers Building Society charges £30, while Marks & Spencer Money's bond products charge between £50 and £100.
While these terms and conditions can make comparisons tricky, ultimately, how good - or bad - an account is largely depends on how you intend to use it.
If you're happy to chase rates, go for the bonuses. If you don't need to touch your savings, take a higher rate offered by a term-based account or one with penalties for withdrawals.
Alternatively, if you need to dip into your savings regularly, go for a no-strings instant access account. By finding the savings account that suits the way you save, you can look forward to some very simple, straightforward savings growth.
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