On the face of it, now is not the right time to be saving money. The Bank of England has reduced the base rate to an all time low of 0.5% in a bid to revive the economy, there has been a dramatic drop in interest rates, and the annual return on a lump sum sitting in an account will yield significantly less than it did just a year ago.
However, banks still want you to hoard your money with them, and they’ve had to be more inventive than ever in this economic slump to offer appealing savings options to customers. This has proved to be a tricky balancing act, and has lead to a plethora of accounts which promise much but deliver little in the long run.
Instant access vs online accounts
Instant access accounts are savings that you can deposit or withdraw money from whenever the mood takes you. They are the most flexible type of savings account.
Online savings accounts also allow you to access your money whenever you want, and often have the better rates. However, although these accounts are easy access, they are not instant access (as the accounts are managed entirely online, you have to transfer your money to a seperate account to withdraw it). Online accounts are often the better option, unless you’re a complete technophobe, or you desperately need to be able to withdraw cash instantly.
The privilege of flexibility and easy access usually comes at the expense of preferential rates, but instant and easy access accounts can still work for you. It’s a competative market, so it definitely pays to be aware of the tricks banks use to try and lure you into banking with them. Here we list some of the catches that savers should be aware of when looking for the right account.
A bonus rate is a rate of interest that is only applicable for a set period (usually 12 months) from when an account is opened. Once this time has passed, you are left with the underlying rate which will often be significantly lower.
Banks use these bonuses to reel in potential customers, and they can seem like an attractive prospect as they hover near the top of price comparison tables.
They are unavoidable, and floor rates on these accounts are dependent on the wider financial situation so it’s worth shopping around for both a good bonus and a decent underlying rate. Banks will rarely notify you when your bonus period is about to expire, so it is worth keeping track of these developments yourself. When your bonus period has expired, you should start thinking about moving your money and taking advantage of better introductory rates elsewhere. After all, if you can make your money work harder for you, why wouldn’t you?
High initial deposits
Some accounts will require you to make a high deposit on opening the account, as opposed to the £1 minimum that most savings accounts will have. This makes them inaccessible to those with less start up cash, and less attractive to those who intend to build their savings up over a period of time.
Balances and withdrawals
Each account has its own little quirks when it comes to allowances on your balance and withdrawals, and breaching any terms relating to these will often result in a financial penalty of some sort.
Some banks will ask that you keep a minimum balance in your account at all times, and should your balance drop below this amount, your interest rate will fall significantly.
You can also lose your interest, incur an admin charge or even have your account closed if you make too many withdrawals. Penalties won’t always too severe and some accounts will only reduce your rate for the months where withdrawals are made. Further restrictions on withdrawals may also take the form of a maximum amount you can take out within a given period, or even a minimum amount you can take out each time you make a withdrawal.
Accounts that offer a generous rate for a limited time may be subject to a maximum monthly deposit, limiting the amount you can stow away.
You may have to hold a current account with the bank or building society before you can open a savings account with them.
How is the interest being paid?
An account that pays interest on your savings each month rather than annually is more beneficial if you want to start making an extra income on your savings right away. Some banks will also pay the interest you accrue into any account other than the savings account itself, which means that you cannot gain interest on your interest…and that’s part of the fun!
Are the rates variable/guaranteed?
Banks will sometimes put a disclaimer on the interest they are offering and make their rates variable – that is, subject to alteration based on wider financial changes. Bonuses will often be fixed and the underlying rate variable, but some banks will guarantee rates, either fully or partially, giving customers piece of mind.
Does the account only run over a fixed term?
Fixed-term accounts offer generous rates for a limited time (usually 12 months), and after this period you will automatically be switched to a standard instant access account on a lower rate. In a sense, they operate in very much the same way as bonus rates, except that the details are less apparent and buried deeper in the small print.
The whole business of finding the right savings account is a potential minefield, and it will be impossible for you to avoid all of these catches: a good rate is likely to only run for a year, an account that comes with a cashcard may come with a limited number of withdrawals, and so on. But it is definitely worth shopping around and seeing which account best suits your needs, based on how much you intend to save and how often you want to dip into your savings.
Because the terms of your account can change, and deals elsewhere can crop up at any time, make sure you keep one eye on the market to ensure that you are getting a competitive rate!
Even though the interest rates aren’t at their highest, saving is still important and you just have to look that little bit harder when finding an account that will make your money work for you and yield a tidy profit. Also, as inflation comes down, the currently low rates will actually give you a better return.