How do Post Office savings shape up?
Moves by the Irish government to increase the depositor guarantee from economic turmoil will see Post Office savers receive nearly £80,000 of their money protected.
Although the vast majority of savers in the UK are covered by the Financial Services Compensation Scheme (FSCS), which will pay compensation up to £35,000 (increasing to £50,000 on 7 October) in the event that a bank fails, savers in Ireland are now covered by to €100,000 (approximately £78,700).
Because the Post Office offers its savings deals through Bank of Ireland, its savers are included in the new scheme and therefore will receive nearly double the protection that other depositors in the UK enjoy.
The move could spark a flurry of savers moving their cash over to Post Office accounts, in search of extra protection. In recent weeks, search comparison website moneysupermarket.com has reported an increased number of people moving money between accounts in a bid to reduce their exposure to any one bank.
There are also reports that some savers have been opting for Northern Rock saving accounts, not because of the rate but because 100% of all money deposited in this bank is guaranteed by the government for as long as it remains in public ownership.
So, overlooking the extra protection the Post Office offers savers, how do its deals compare to what else is out there?
The Post Office currently offers one cash ISA paying 6.25% AER, including a 1.5% bonus for 12 months. This rate is variable, and tracks the Bank of England base rate, whether it goes up or down, until January 2010.
The minimum deposit for this account is £1 and, as with any ISA, you can only deposit up to £3,600 per tax year. Two benefits of this ISA is that, firstly, it accepts transfers from previous ISA years and, secondly, it has no withdrawal restrictions other than requests must be made in writing.
The Post Office’s ISA does offer one of the more competitive rates on the market. Elsewhere, Ruffler Bank pays a flat-rate of 6.25% AER, but the minimum deposit is £3,600. On the plus side, transfers are allowed.
Also paying 6.25% is Barclays. This rate includes a 1% bonus for 12 months, but unlike the Post Office and Ruffler transfers are not permitted. The minimum deposit is £1.
The Post Office offers an instant saver account that pays 5.75% AER (variable), including a 1.5% introductory bonus for new customers for 12 months. One of the key benefits of this account is that it is very accessible, and savers can make payments and withdrawals in-branch, by post, phone, online or at over 60,000 ATMs nationwide.
When it comes to instant access accounts, you should always take the withdrawals restrictions into consideration. With the Post Office’s product, you can take out up to £1,000 a day in cash of cleared funds, with larger amounts requiring a cheque or BACS transfer. Customers, however, are only allowed to make six withdrawals each year from 21 March to 20 March. After that, all withdrawals cost £1.
Another point to bear in mind is that this deal only offers annual interest payments (in March) so if you require a regular income from a savings account through monthly payments, this is not the account for you.
The minimum deposit on this account is £500, but additional payments can be from as little as £1.
Rate-wise, the Post Office’s deal is not one of the best around at the moment.
Alliance & Leicester, for example, pays 6.6%, while West Bromwich Building Society pays 6.56% AER on its no-notice instant access account and Kaupthing Edge pays 6.55%.
All these accounts have flat rates of interest, meaning you don’t have to worry that your rate will suddenly shrink after 12 months.
Alliance & Leicester’s eSaver may boast a great rate of interest, but it won’t be for everyone. The account will not pay any interest in months where withdrawals are made (except for July) so if you want to regularly dip into your savings this is probably not the place for your cash.
On the plus side, the account offers savers the choice of earning an annual rate of interest (6.6%) or receiving a monthly income of 6.41% interest, which is paid into your current account and is not treated as a withdrawal.
West Bromwich’s no-notice account also has a top rate, but bear in mind that if your balance falls below £1,000 you will only earn 3% AER on your nest egg. And, again, withdrawal restrictions apply; you can only make six withdrawals a year.
And West Bromwich takes no prisoners - on the seventh withdrawal, your account will be closed and funds returned.
Finally, Kaupthing Edge pays 6.55% AER – but you won’t actually receive this. Interest is made monthly, therefore in reality you only earn 6.36% interest. Again, you must have £100 in your account in order to earn interest.
The Financial Services Compensation Scheme is the compensation fund of last resort for customers of authorised financial services firms. If a firm becomes insolvent or ceases trading, the FSCS may be able to pay compensation to its customers. Limits apply to how much compensation the FSCS is able to pay, and those limits vary between different types of financial products. However, to qualify for compensation, the firm you were dealing with must be authorised by the Financial Services Authority (FSA).
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.
A savings account on which the account holder is required to give a period of notice before making a withdrawal or face a penalty, usually a loss of a specific number of days’ interest or pay a fee. Notice periods of 30, 60 or 90 days are common. These accounts usually pay higher than average interest rates and require large initial deposits (£1,000 minimum) so the notice period and penalties are there to discourage withdrawals. Some of these accounts will only allow a certain number of withdrawals a year.
An account opened with a clearing bank (few building societies offer current accounts) that provides the ability to draw cash (usually via a debit card) or cheques from the account. Some pay fairly minimal rates of interest if the account is in credit. Most current accounts insist your monthly income (salary or pension) is paid directly in each month and they offer a number of optional services – such as overdrafts and charge cards – which are negotiable but will incur fees.
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.
Created in 1968, BACS is a not-for-profit industry body, owned by 16 of the leading banks and building societies in the UK and Europe. All direct debits, standing orders, credit card payments, personal loans and the vast majority of salary cheques are processed through BACS. In 2010, 5.7 billion UK payments with a total value of £4.06 trillion were processed through the system.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.
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.