Act now if your bonus is about to expire
If you've seen the bonus rate on your savings account or ISA run out - or it's due to in the weeks ahead - then now is the time to find a new home for your nest-egg.
The number of savings account with bonus - or introductory - rates in the best-buy tables has rocketed over the past few years, as providers look to ‘hook’ new customers into deals that would otherwise not be all that competitive.
The size of bonuses on offer have also increased. According to moneysupermaket.com, the average bonus rate is currently 1.93%, compared to 0.71% two years ago.
However, you could double the return cash with a bonus rate at the moment. For example, Birmingham Midshires has a telephone savings account paying 3.15% including a bonus of 2.65% for the first 12 months, while Egg's internet savings account pays 3.25% AER, including a 2% bonus for the first year.
While opting for an account with a bonus may boost the earnings you make on your savings, it won’t last forever. The danger for many savers is that they forget to review their savings on a regular basis, and risk their money ending up in a deal paying next to nothing.
The internet savings account from Egg is a good example – after just 12 months, the interest you’ll earn on your money will revert to 1.25% AER. When you consider that the top instant access account currently pays 3.3% (Coventry Building Society) this is far from competitive.
Kevin Mountford, head of banking at moneysupermarket.com, says: "Savings rates are highly inflated at the moment because banks and building societies are still desperate for our cash. But savers who take out bonus rate savings deals should also take note of when the bonus ends and be prepared to switch accounts once this happens.
That’s not to say you should discount savings accounts with a bonus introductory rate.
“A really savvy saver can use bonuses to significantly boost their returns as long as they are willing to put in a little effort," says Mountford.
Coventry Building Society has a good bonus deal on offer at the moment. Its postal instant access account pays 3.3% AER on balances between £1,000 and £250,000, and includes a 1.3% bonus for the first year. Bear in mind, though, that you can only make four penalty-free withdrawals a year, and these must be at least £1,000.
What if you bonus has expired?
People who opened a savings account last year may have already noticed their interest rate drop. It this is the situation facing you at the moment then now is the time to take action.
Moneysupermarket.com estimates that savers who invested £3,000 in a top-paying savings account would have earned an average of £92.85 in interest in year one, but by leaving their money where it is this will fall dramatically to just £33.63.
The comparison website estimates that nearly half of all savers have never changed their saving account and nearly a third have never checked their savings rate.
Don’t let banks and building societies benefit from your inertia – especially as loyalty rarely pays off.
David Black, banking specialist at data provider Defaqto, explains: “Anyone who has had the same variable-rate savings account for a while can almost certainly get a better deal by transferring their funds to a new account.”
Black warns that banks and building societies are putting all their efforts into attracting funds from new customers, rather than their existing savers, and are therefore reserving the best deals for people who have never saved with them before.
While this is bad news, it does present an opportunity – by moving your money you can take advantage of the demand for fresh funds.
“Savers need to wake up to what’s happening and get a better return on their funds by proactively jettisoning loyalty as it simply isn’t paying,” Black adds.
You can find the best savings rates on the market – for fixed, instant access and regular deals – in Moneywise’s daily round-up of the savings market.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
Where APR is the rate charged for money borrowed, Annual equivalent rate is how interest is calculated on money saved. The AER takes into account the frequency the product pays interest and how that interest compounds. So, if two savings products pay the same rate of interest but one pays interest more frequently, that account compounds the interest more frequently and will have a higher AER.