Savers must shop around or get stung on interest

Published on Friday 22 January 2010 18:47

AMID the big chill and the festive frivolities, someone must have forgotten to tell our banks and building societies that it's better to give than to receive.

The savings market is a woeful case in point and although many savers have money languishing in poorly performing accounts, banks do little to actively encourage them to switch to comparable, but better performing products, as they become available.

James Daley, editor of Which? Money, is quick to criticise savings providers. "In an ideal world, we'd love to see banks switching their customers into better accounts when they lower their interest rates, but it seems unlikely this will ever become common practice," said Daley. "The banks rely on inertia to try and make a profit, paying substandard interest rates to anyone that doesn't pay attention to their savings accounts." However this state of affairs is set for a shake-up in May, as the Financial Services Authority (FSA) has outlined a new regime to help customers keep on top of changing interest rates.

Under the City watchdog's new Banking Conduct of Business rules, coming into force on 1 May, banks and building societies must give customers advance notification of changes that are detrimental to the returns they receive on their savings.

However, the FSA will not insist on minimum standard rates across a provider's range of savings products nor take action against organisations that allow customers to wallow in poorly performing accounts.

A spokesperson for the FSA said: "It is for customers to make decisions on where they save, but we would certainly encourage people to shop around."

Speaking up for savings providers, Andy Hutchinson, head of savings at Nationwide, said: "We advertise all new products online, in branches and support the launch of new accounts with an integrated press campaign to ensure as many of our customers know about the options available to them."

Where customers are looking to freshen up their savings arrangements, the paltry returns available – particularly those for instant access accounts – make it difficult to get excited about making the move. However, there are two significant reasons why savers should make the effort.

In the first instance, savers can still secure significantly better deals than many are currently enduring, as Kevin Mountford, head of banking at moneysupermarket.com, explained: "There is a massive difference when you look at the best and worst rates available on the market and it really does pay to be savvy and find the best place for your money. The average rate of the top five easy access savings accounts is nearly 2.87 per cent higher than the average of the lowest five rates available."

A margin of 2.87 per cent may not seem a huge difference, but when one considers that the best rates of over 3 per cent are over 60 times higher than the worst rates of below 0.05 per cent, the differential soon becomes apparent.

If a pint of milk were 60 times more expensive in one particular shop, how many people would ever buy it?

On top of the financial benefit that switching offers, going through the process once will hopefully demonstrate that in the majority of cases the task is not an unpleasant or overly onerous one.

Indeed, while writing this article, I decided to apply for the Online Saver Issue 7 account from Alliance & Leicester, where I already hold an account.

This online process took a matter of minutes and I had confirmation that the application had been received almost immediately.

Notification that the application had been successful came the next day and the account was active the day after, allowing me to transfer the funds online and into their more lucrative new home.

The new account pays a rate of 2.75 per cent in comparison to the 0.1 per cent I had been receiving. The interest will not be the stuff of retirement dreams, but at least it will actually be worth receiving.

This is a process that others can easily follow and it is a good habit to get into when savings rates are so changeable.

Mountford commented: "Shopping around and comparing products has never been easier. Not only can you use a comparison site to seek out the best deal on the market, but the actual movement of money from one account to another is now almost seamless with many products available direct for online sign-up."

In becoming more fluid in their approach to opening and closing savings accounts, savers need to remain mindful of their own needs and ensure they are not hoodwinked by headline rates.

For example, savings accounts linked to other types of accounts can look attractive, but sometimes come with problems of their own, Daley warned: "We would recommend that people be very wary of financial products that are tied to each other. Taking out a savings account is a different business to taking out a current account, and you may regret signing up to a provider that offers high introductory savings rates for new customers."

Factors such as service are hugely important considerations when people are thinking about changing their current account and the savings considerations should be weighed carefully alongside the everyday banking needs of the individual.

Daley concluded: "If you're looking for a new current account, we believe that customer service is one of the most important factors.

"However, Abbey – which currently offers a very attractive 6 per cent interest rate to customers who sign up to one of its current accounts – comes out at the bottom of our customer satisfaction surveys for current accounts, with a score of just 48 per cent."

On a day-to-day basis this may mean the attractive rate is not worth the extra hassle of running the current account.

What is worth the hassle, however, is looking out the best bona fide savings product for individual circumstances and then refreshing things on a regular basis.