Do online savings accounts offer the best deal?
Savers who opt for instant access accounts with online-only access can earn a better interest rate on average than those who choose branch, telephone or postal access.
New figures compiled by data provider Defaqto on behalf of Moneywise reveal that the average rate on instant access deals is currently just 0.8%. However, the average return jumps to 1.59% on accounts that can only be operated via the internet.
In comparison, the average rate across instant access accounts that do not allow online access is a dismal 0.65%. Branch-only deals, meanwhile, pay on average just 0.54% while postal-only accounts pay an average interest rate of 1.05% and telephone-only deals pay 1.44%.
|Access||Average interest rate (AER)*|
|All instant access deals||0.8%|
|Source: Defaqto 28/09/09
* Rates are based on a £1,000 balance for instant access accounts only. The access column refers to the only transaction channel available once an account has been opened
However, although average rates on online-only deals come up trumps compared with other access methods, savers could still be losing out.
David Black, head of banking at Defaqto, explains: “Online accounts can offer better deals but there are also many examples of online accounts that are not competitive. Just because something is online doesn’t mean that it’s competitive or indeed that it will remain competitive in the future.”
The market-leading online-only deal is a case in point. Alliance & Leicester currently tops the board, paying 3.15% AER on deposits betwen £1,000 and £2 million. While withdrawals are unlimited, savers should bear in mind that the rate includes a bonus of at least 1.65% for the first year.
It's therefore worth looking for a new home for your money after 12 months.
Are they worth it?
While online-only instant access savings account allow you the luxury of being able to manage your money anywhere at anytime, they do also have drawbacks. For example, if you want to deposit additional money in your account you won’t be able to do this via a branch.
For people who aren’t fully comfortable using the internet for their banking needs, then an online-only account probably isn’t for you.
“Internet use won’t suit everyone as clearly users have to have internet access and be happy with using it as well as keeping their internet security up to date,” says Black.
It's also worth noting that just because average online-only rates beat branch, telephone and postal access deals hands down, it is possible to get the best of all these access methods.
For example, Defaqto’s figures show that the best instant access deal currently on the market can be managed via the post and telephone as well as online.
However, you could earn 3.3% AER with Citibank's Flexible Save account - compared to Alliance & Leicester's 3.15% AER.
This deal allows you to save between £1 and £1 million, and there are no restrictions on the number of withdrawals you are permitted to make. Bear in mind, though, that this rate includes a bonus of 2.25% for 12 months, so after one year it's probably worth finding a new home for your cash.
Meanwhile, the best telephone-only account pays the same rate as Alliance & Leicester's deal.
Birmingham Midshires offers a telephone account also paying 3.15% AER on balances between £1 and £1 million. Access and withdrawals are unlimited, but this deal can only be managed via the telephone.
Again, this rate includes a bonus of 2.64% for the first 12 months - so make sure you review your options after this time.
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.