The danger of bonus savings rates

Danger sign

Savers have been warned to check the small print on accounts offering introductory bonuses, amid evidence that thousands of people remain reliant on these rates to boost their returns.

Research suggests that while the number of accounts offering bonus rates remains fairly stable, the introductory deals on offer have become more attractive as banks and building societies continue to vie for your money.

Data provider Defaqto says that last April the average introductory bonus was 0.6%; however, this peaked at 0.92% in January this year and is currently at the 0.9% mark. The number of accounts offering bonuses has increased slightly, from 15% last March to 15.1% today.

Meanwhile, research from Investec Private Bank reveals that there were 150 accounts offering bonus rates on balances of £25,000 or more as of 1 February 2009. The average bonus offered increased by 0.01% to 0.84% between 1 November 2008 and 1 February 2009.

However, the average length of bonuses has decreased, as providers offset the cost of offering more attractive rates. In February 2009, the average bonus lasted for 265 days, down by 19 days (nearly three weeks) from October 2007.

The low interest rate environment means thousands of savers remain reliant on short-term bonuses to boost the returns on their money. However, savers have been warned to watch out for bonuses – especially where the introductory rate is variable and can change over time.

Linda McBain, head of banking at Investec Private Bank, says: “Many accounts continue to use bonuses to inflate their headline savings rates. However, while these bonuses are often attractive to savers, they should be aware of the size, longevity and conditions of such offers so that when they expire, they are prepared to switch if they feel that they are not being offered consistently attractive rates.”

David Black, head of banking at Defaqto, says there are two issues with bonus rates. Firstly, although customers are made aware of when these run out when they open an account, providers rarely remind them down the line.

“It’s important to make a note in your diary of when your bonus period ends, and then take the time to look at the mark and reappraise whether your account is still the best place for your money,” he adds.

In addition, several savings providers offer variable bonus rates rather than fixed ones. This means that the bonus you earn could change during the term of your account.

For example, Egg’s internet savings account has a variable-rate bonus. In November 2008, when the account was launched, this bonus was 1.25%. On 19 December this increased for both new and existing customers to 2%, and again on 20 February to 2.1%.

However, on 12 March Egg reduced the bonus rate for all customers to 1.6% and this will fall further from 15 April to 1.25%.

There are concerns that providers with variable-rate bonuses could increasingly tweak these. Kevin Mountford, head of banking at, warns: "With interest rates expected to remain unchanged for the foreseeable future, this practice could become more prevalent.

"Banks and building societies won't be able to use base rate changes as an opportunity to manipulate profit margins so they may look for other ways of doing so, of which this is one."

Abbey and Alliance & Leicester also use variable-rate bonuses. For example, Abbey’s instant access saver (issue 3) pays 2.5% including a variable bonus of 1.5%.

Sue Hannums, a spokeswoman for Abbey, says: “Variable-rate bonuses are not new, but Egg has put the cat among the pigeons by changing its bonus rate. We have never changed the bonus rate on this account and have no plans to do so at the current time.”

Despite the concerns about bonus rates, Mountford says that are worth considering - as long as savers are mindful of how their rate could change over time.
"At a time when so many accounts are offering rock-bottom rates, bonuses are a great way for savers to get returns well above the 0.5% base rate," he adds. "Banks are desperate to claw in savers' cash, and use bonus rates to tempt in new customer deposits.
"Once the bonus period ends, providers hope most customers won't be bothered to move their money despite the lower rate. However, savers can easily play the banks at their own game as long as they keep switching to the most competitive deals when the bonus period comes to an end - usually after 12 months."


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