Banks and building societies have become increasingly sophisticated over the years, introducing a range of promotions that make their accounts appear more competitive and elevate them to the top of the best buy tables. For the canny saver, these features can be a great way of squeezing out as much interest as possible, but for others they can be an expensive trap. Below are some of the potential ‘tricks’ to look out for.
Having disappeared for a while, a number of the current best buy accounts are once again including what is known as an introductory bonus and so it’s important to understand just what this means. A more straightforward description would be that the account pays an enhanced rate of interest for a specific period of time, such as twelve months.
For example, the Tesco Bank Internet Saver is paying 1.25% gross/AER, but this includes a ‘bonus’ of 0.70% for the first 12 months. Which means that if you don’t move it after 12 months, assuming the underlying rate remains the same, you would start earning just 0.55% going forward.
So, when your account includes a bonus, it’s essential to make a note of when it is due to end, so that you can find another competitive account to switch to at that time. Remember, banks and building societies are counting on you to not move your funds and remain on the lower rate for as long as possible. You can call their bluff by doing the opposite.
Also look out for accounts that revert to a different, lower-paying account at the end of a set period – whilst they don’t state that the headline rate includes a bonus, these are still bonus accounts, just in disguise.
We are not, however suggesting that bonus accounts should be avoided, if you are on the ball and move your funds after the introductory bonus ends, they can be used to your advantage to get a better return.
Another strategy is to offer an easy access account that will penalise you if you try to access your money too often. For example, the provider may offer a very competitive interest rate, but the account allows only a limited number of withdrawals over a year. If more withdrawals than stipulated are made, the rate will often drop dramatically, usually to an uncompetitive level. Lower rates tend to then apply for the rest of the year before the number of withdrawals are ‘reset’. And with some accounts, you get a lower rate or even no interest in any month that a withdrawal is made.
A current example would be the Nationwide Single Access ISA. This is paying a market-leading 1.30% tax free/AER, but if you make more than one withdrawal per year, the rate will drop to 0.50% for the remainder of the account year.
While it is more common to impose a temporary lower rate period when excess withdrawals are made, in some cases the account will be closed or no further access to the money granted, so it is very important to check the terms and conditions of the individual accounts.
These accounts are, therefore, only appropriate for those who don’t need access to their funds very frequently. They can be a good way to get a higher return, as long as you are clear on the terms and conditions and are able to plan withdrawals carefully.
Lower rates on lower amounts
This may sound obvious, but some accounts pay higher interest rates the more you have in the account, which is great for those with larger amounts to invest. However, the reverse is also true, so making a withdrawal can lower the rate paid on your funds. Again, it is a case of being aware of the terms and conditions of the account, being clear where the interest rate thresholds are and planning withdrawals around this.
Lower rates on higher amounts
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 to be vigilant when opening an account. Check the rate that you will earn on the amount you invest and that you can add to it without detrimentally affecting the interest rate.
Sainsbury’s Bank has an account which includes both of these features. Its eSaver Special offers a competitive rate of 1.26% gross/AER on balances of £30,000 to £500,000, but it is a tiered account, so if the balance drops below £30,000 the rate earned drops too. And if the balance exceeds £500,000, the amount over that threshold will earn just 0.50%.
As illustrated above, some accounts may involve a combination of all these tricks of the trade, but by being aware of the terms and conditions of these accounts, you can use them to your advantage and boost your savings balance.
Read our ‘Facts’ under each of the accounts featured on our Best Buy Tables and the terms and conditions of each account carefully before proceeding to ensure you are aware of how the account works. If you are unsure of any aspect of an account, give us a call on 0800 011 9705 and one of our savings experts will be happy to help.