The recent announcement by the Financial Conduct Authority that they will be conducting a market study into the £1trillion cash savings market is great news. So far the focus has been on teaser rates or bonuses and whether they should be allowed.
At the moment bonus rates are out of favour – but this doesn’t mean that savings accounts are simple again. There are still a lot of other tricks to watch out for that could damage your savings health!
We think to achieve the best rates these days, savers need to jump through increasingly complicated hoops. Terms and conditions on accounts have expanded from the days of simple savings accounts. Now many are littered with restrictions that could confuse savers, leaving them languishing in poor paying accounts if they don’t abide by the rules. Savers are often bamboozled with bonuses, withdrawal restrictions etc, let alone the ever increasing new issues of the same account.
Some accounts may involve a combination of these tricks, so it is important to read the terms and conditions carefully before proceeding.
We’ve run through some of the traps that savers should look out for – some examples can be found in The Stats Bank below
• Bonus accounts teaser rates
In the past many of the best accounts offered an enhanced rate of interest for a specific period of time, such as 6 or 12 months. At the end of this ‘bonus’ period the rate will plummet, so it’s essential to make a note of when the bonus is due to end. Our Rate Tracker and Concierge services are perfect to help savers find better rates at that time.
A bonus account is great for those who will be ready to switch to the next best account at the end of the bonus term, but for those who are more likely to just leave the money languishing, bonus accounts are a trap.
It’s worth noting that far fewer bonus accounts are around at the moment – rates have fallen so far that bonuses are actually a way of keeping the rate inflated, so obviously the providers are no longer interested.
• Restricted access
Another ploy is to offer a so-called easy access account that will actually penalise you if you try to access your money too often. If more withdrawals are made than stipulated, the rate may drop dramatically, in some cases the account will be closed or no further access to the money granted.
These accounts are, therefore, only really appropriate for those who don’t need access to the account very frequently.
Lower rates on higher amounts
Mercifully only occasionally, the rate of interest on an account will actually fall if the cash invested is higher than a certain amount, so again it’s important for savers to check the rate that they will earn on the amount they invest and that they can add to it without detrimentally affecting the interest rate.
• Getting back less then you put in
Fixed rate bonds and notice accounts may offer instant or earlier access to your money but with a penalty equivalent to a certain number of days interest. What many savers may not realise, is that if your account has not earned enough interest to cover the penalty, this can be taken out of the capital; so you may actually get back less than you put in – so savers should plan carefully.
THE STATS BANK
Bank of England Base Rate: 0.50%
Inflation figures: CPI – 2.70%, RPI – 3.30%
Rate needed to beat CPI inflation = Basic rate tax – 3.38% / Higher rate tax – 4.50%
Number of accounts that beat or match inflation
Easy Access – 0
Notice – 0
FRB – 7 YR – 1 (non and basic rate taxpayers only), 5 YR – 0, 3 YR – 0, 12-18 mths – 0
ISAs (total) – 8 (this includes First Direct which is dropping its rate in November)
Examples of savings accounts which are not all that simple
Accounts with bonuses
Nationwide Building Society – Easy Saver ISA Issue 3
Rate of 1.75% includes a bonus of 1.25% fixed until 30/11/2014.
BM Savings – Online Reward
Rate of 1.70% reverts to 0.50% after 12 months and if you make more than 4 withdrawals in the first 12 months.
Accounts with restricted access
Britannia – Select Access Saver 3
Current rate of 1.75% gross/AER.
Maximum of 4 withdrawals per year. Any further withdrawals and the rate drops to 0.10%.
West Brom – Branch Easy Access Saver 3
Current rate of 1.60% gross/AER.
2 penalty free withdrawals per year, subsequent withdrawals subject to 60 days’ loss of interest.
Account which pays a lower rate on a higher balance
Sainsbury’s – eSaver Special
Variable interest – currently 1.45% gross/AER. If your account goes above £100,000, the rate of 0.50% gross/AER will apply on the full balance.