Lured in by high savings rates? Mind you don’t stay too long

BANKS and building societies have been cashing in on the demand for decent savings returns by launching a raft of eye-catching offers. But millions of people lured into the accounts are now getting miserly returns after failing to switch out once the short-term deals end – falling into the trap set for them.

The clamour for higher cash returns is being driven by a combination of inflation and low interest rates that has laid waste to savings income over the past three years.

And savings providers have sought to capitalise by stepping up their marketing efforts in recent months, with more attractive offers hitting the market and average interest rates edging up. But while the best-buy savings accounts are increasingly competitive – albeit still short of inflation – many of the top deals feature bonus rates that plummet sharply when the introductory term is over.

Nearly 400 savings accounts now pay interest of 0.1 per cent or less, a 23 per cent jump from last year, according to consumer group Which?. And there has been a 50 per cent rise in the number of accounts paying 0.1 per cent that are now closed to new customers – branded “zombie accounts” by the organisation. When an account is closed, there is no longer any incentive for the bank or building society to pay a decent rate, especially if they can be confident that most people will leave their cash where it is.

The proliferation of these accounts reflects the extent to which banks and building societies are now concentrating their savings efforts on promoting deals with short-term bonus periods.

Andrew Hagger, head of communications at Moneynet, explained: “With the base rate at just 0.5 per cent providers can’t afford to offer rates 2 per cent or more above it for the long term, yet by utilising a 12 month bonus they can advertise a market leading rate to draw in balances.

“But because providers know that after 12 months a proportion of people will forget to switch, or won’t switch immediately, the net cost to the bank falls dramatically in year two – as does the return for the customer.”

Of the 483 instant access accounts currently available, almost a fifth have introductory bonuses, ranging from 0.1 per cent to 2.7 per cent, according to financial researchers Defaqto. The average bonus paid is currently 1.29 per cent over a typical period of just over 11 months.

The problem for savers is that the rate typically plummets as soon as the bonus rate disappears – and the apathy that providers are banking on means few people move their money elsewhere at that point.

Sylvia Waycot, spokeswoman for Moneyfacts, said: “The headline rates offered on bonus accounts attracts great PR for the provider and in turn offers the customer a good return on their savings. However, once the bonus period has run its course the interest rate will drop and this can be a dramatic drop.

“It is important that anyone in a bonus account makes sure they review the rate regularly and move their money if a more competitive account can be found. The truth is far too many people forget to do this.”

If you deposit £1,000 in the average instant access account that has an introductory bonus you’ll get a rate of 2.13 per cent (within a range from 0.6 to 3.15 per cent), Defaqto figures show. But when deals with bonus periods are taken out the average instant access rate plunges to 1.02 per cent. The lowest is 0.01 per cent – of which there are many – and the average is distorted by accounts with guaranteed minimum rates, such as the Premier Instant Access from Manchester Building Society (currently paying 3.06 per cent).

David Black, head of banking at Defaqto, said: “If you look at the best buy tables for variable rate instant access accounts, most have either an introductory bonus or a guaranteed minimum rate for a limited term.

“These enable the providers to advertise attractive headline rates in order to attract retail deposits. It would cost them substantially more if they paid the same rate to all their existing savers as well.”

When an account includes an introductory bonus element providers have to make it clear in the advertisement, as well as in the terms and conditions. Crucially they now also have to let the customer know when the introductory bonus is set to end.

Even so, it’s worth setting yourself a reminder of the date on which the bonus period ends as a prompt to shop around for a better deal.

“If you’ve had a variable rate account for over a year then you could almost certainty get a better rate from a similar type of account elsewhere,” said Black. “It is also worth looking out for any withdrawal restrictions because if you transgress them it may substantially reduce your interest.”

The top paying savings offers currently available are fixed rate bonds. But the best of these involve leaving your cash out of reach for three to five years.

“Make sure that you invest funds that you won’t need to access during the term because early withdrawals tend to be either expensive in terms of interest penalties or not permitted,” Black noted.

Even here you need to keep any eye out for deceptive offers, according to Hagger, who pointed to a “non-customer-friendly tactic” employed by Royal Bank of Scotland.

“If you want a fixed-rate bond, you can apply now but the term doesn’t start until 10 January. In the meantime you earn just 2 per cent interest on your balance. This is an unusual practice – with the vast majority of fixed-rate bonds the account is opened pretty much straight way.”

The best paying savings deals on the market may still be eroded by the effects of inflation, but someone with £5,000 in a 0.1 per cent account could boost their return from £5 to more than £150 just by switching to an account paying 3 per cent.

And if you have access to the internet it’s never been easier to track down and open a competitive new account each year.

“If you put a reminder in your diary for a month before the bonus is due to expire, it gives you time to make arrangements to open your new account,” said Hagger.

“It’s an old message but still a valid one: if you want the best rates, you need to manage your savings yourself as you can’t rely on your bank or building society to point you in the right direction.”

Top three bonus-based savings accounts

1. Coventry Building Society Poppy Online Saver – 3.15 per cent including 1.15 per cent bonus for year one. Put £5,000 in and you would get interest of £157.50 before tax in year one falling to £100 in year two.

2. Santander eSaver4 – 3.1 per cent including 2.6 per cent bonus available in year one.

A £5,000 sum would earn interest of £155.00 before tax in year one falling to £25 in year two.

3. Bank of Scotland Internet Saver – 2.8 per cent including 2.7 per cent bonus for year one. £5k in this account would earn £140.00 before tax in year one falling to £5 in year two.

Source: www.moneynet.co.uk