Five savings account catches to watch out for
Nearly 50% of people now use the internet to make financial decisions such as searching for a new savings account, according to research by Nationwide.
Yet, despite many of these savers relying on search comparison websites to help them find the top deals, 45% think it is unacceptable that not all the product information (beyond interest rates and terms) are shown.
Moneywise agrees that search comparison websites and tools, while useful for gauging the top products out there, do not offer you everything you need to know about a product.
This is why Moneywise reviews the savings market on a weekly basis to find the top ISA, fixed-rate, instant access and regular savings deals. Our reviews look beyond just the rate - for example, we investigate which instant access accounts have withdrawals restrictions, which deals pay interest monthly as well as annually, and which ISAs accept transfers.
So, when it comes to using search tools to find a savings product, there are several things to watch out for.
1. Introductory rates
Some of the best deals may advertise AERs of X% but in reality you may not actually be getting this rate because it includes an introductory bonus.
While this bonus may boost the earnings you make on your savings, it will normally only last for between six and 12 months. So, once the introductory bonus expires, you are left with a savings account with a lower AER.
That's not to say you should automatically reject accounts with introductory bonuses; just make sure you take it into account, and if necessary move your money to a more profitable home once it expires.
Not all providers will remind you once a deal is due to expire so make sure you make a note in your diary – or use an online money management system like Allfiled, which will remind you about key dates in your financial calendar.
2. Withdrawal restrictions
Fixed-rate interest accounts tend to offer the most competitive AERs, but are only suitable for people prepared to lock their savings away for 12 months or longer. Accessing your cash during the term will see you either lose interest or the account closed early.
If you would rather have to option of dipping into your savings every now and again, then an instant access account might be more suitable.
However, most of the top instant-access deals are not quite all they seem to be. The majority come with withdrawal restrictions that make accessing your money harder than you might imagine. For example, some accounts don't pay any interest in months when a withdrawal is made while others restrict you to a set number of withdrawals a year.
If you exceed this number you may face a charge – or, in some cases, your account will be closed and your funds returned to you.
3. The regular savings sting in the tail
Regular saving accounts are a great way to start a disciplined savings habit as they enable you to put away a set amount each month.
However, as with any regular payment, commitment is a must. Many providers will fine you if you miss a monthly deposit – bad news if you get caught short one month or just want to take a savings holiday.
4. Earn an income
Most people use AERs when comparing saving deals, but if you want to earn an income from your nest egg you'll better off opting to receive your interest on a monthly rather than an annual basis.
Bear in mind, however, that the interest you earn is likely to be reduced if you opt for monthly interest payments plus not all accounts offer this option. And if you take interest as income you won't benefit from compound growth (earning interest on previous interest payments).
5. Prepare for the worse
When all is said and done, one of the most important things about a savings account is that it keeps you money safe from harm. Prior to 2007, the risk of a bank failing and taking your savings with it was probably not a pressing concern, but the impact of the credit crunch on the financial stability of our banks means this is now a consideration for many people.
The good news is that 100% of the first £85,000 you have in a savings account is protected by the Financial Services Compensation Scheme (or a foreign equivalent if your bank is not fully regulated by the Financial Services Authority.)
However, when it comes to choosing a bank or building society to open a savings account with you should bear these things in mind the compensation limit of £85,000 is per bank.
So, if you have more than £85,000 to save then make sure you spread it across several different banks, as even if separate accounts with the same provider it will not be protected. Also, remember that some banking groups are regulated as one bank.
Finally, make the most of your circumstances. Joint accounts are protected up to £170,000 so you can get away with saving more in one place without jeopardising your protection.
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.