With interest rates on savings accounts taking such a battering in recent months, it’s little wonder that many people have been focusing on fixed-rate accounts where the returns are considerably higher than their instant access equivalents.
For example, the best paying fixed deals offer rates of up to 4.4% while even the most competitive instant access deal looks likely to pay less than 3%. However, when it comes to saving, chasing rates might not necessarily be the right thing to do.
The best-paying fixed-rate accounts require you to lock your money away for as long as five years, with no withdrawals or additional deposits allowed during that time. This is fine if you have a lump sum that you want to put away for the future.
But with unemployment continuing to rise and household budgets still suffering the after-effects of 2008’s huge energy bill rises and rising inflation, there is a strong argument that everyone should, where possible, look to keep at least some of their money in an easy access savings account.
Since October, when the Bank of England announced the first of six consecutive base rate cuts, returns on instant access have fallen significantly. However, the base rate is currently just 0.5% and is now unlikely to be cut any further.
This is good news for instant access savers, as this type of account comes with a variable interest rate that can change in line with the base rate. While some people may have been put off opting for a variable-rate account while the base rate was falling, there is now the security in knowing your returns are unlikely to fall going forward and could even rise when the base rate eventually returns to more ‘normal’ levels.
Michele Slade, spokeswoman for data provider Moneyfacts, says instant access accounts are starting to come into their own in the current environment.
“Rates on this type of account have started to rise recently; smaller savings providers have realised they can’t compete in the ultra-competitive fixed-rate market and are therefore looking at attracting instant access savers instead,” she explains.
“For savers, the fact that their rates probably won’t fall going forward makes this type of deal more attractive – especially as instant access accounts are a great way to save when you don’t know what lies around the corner and want to be able to make withdrawals in an emergency.”
So, what sort of things do you need to consider before you opt for an instant access account? Obviously, getting a good rate is important. But watch out for bonus rates – while these will boost your returns, you need to make sure you make a note of when the introductory rate ends or risk seeing your returns fall.
For example, Coventry Building Society currently offers its special Poppy Save instant access deal paying 3% AER on balances between £1,000 and £250,000. This rate includes a 1% bonus for the first year, so after this time your rate will drop.
This account is great for savers with a conscience, as the Coventry Building Society will donate 0.25% of the average balance to The Royal British Legion's Poppy Appeal.
Skipton Building Society, meanwhile, pays 2.2% AER on initial deposits of £500, but this includes a 0.5% bonus for just six months.
Secondly, check the terms and conditions on accounts carefully. A good instant access account should do exactly what it says on the tin – offer instant access. However, there are deals on the market that restrict the number of withdrawals you are allowed to make or hit you with a penalty in any month you access your cash.
For example, Coventry’s Poppy Save account only allows you to make a minimum withdrawal of £1,000.
Meanwhile, Chelsea Building Society’s Rainy Day instant access savings account allows unlimited withdrawals, but if you take out more than £1,000 in the first 12 months you will be hit with a £10 administration fee.
Finally, Sainsbury’s Finance pays 2.6% AER on its Internet Saver instant account on deposits between £1 and £500,000. However, you can only make three withdrawals during the year – any more and your rate will drop to just 0.75% AER.
The best instant access accounts
Principality Building Society offers an e-Saver account paying 2.85% AER, including a bonus rate of 1.20% for the first 12 months. You only need a balance of £1 to open this account and there are no limits on the number and size of deposits or withdrawals, although the maximum balance allowed is £1 million. This account can only be opened and managed online.
Intelligent Finance, part of Lloyds Banking Group, also pays 2.85% on its online isaver. There are no withdrawal restrictions and you only need £1 to open an account. Again, you can manage your account online and there is also the option to use your savings to offset your mortgage.
This account guarantees to pay at least 1% above the Bank of England base rate until 31 December 2009. However, be aware that you need to have a mobile phone to set up payment instructions to this online account.
Newcastle Building Society offers an Online Saver account paying 2.5% AER on a deposit from just £1. Withdrawals are permitted without any loss of interest.
You can opt for this account to pay your interest on a monthly basis; however, you will need to have a minimum balance of £1,000.
Alliance & Leicester offers an Online Saver deal that pays 2.5% AER variable including a bonus of at least 1% until on 2 August 2010.
Barnsley Building Society also offers an online saver account paying 2.5% on deposits from £1. Again, you can make unlimited withdrawals, but these are subject to daily limits. This deal can be managed online, so you don't need to have a Barnsley branch in your area.
ING Direct pays 2.75% AER, including a fixed 12-month bonus of 2.22%, on its variable-rate savings account. You can open this deal from as little as £1, and there are no penalties or restrictions when it comes to accessing your money. This deal is only for new customers - bear in mind, that interest is paid monthly so you won't benefit from compounded interest.
Stroud & Swindon Building Society pays a variable-rate of 2.25% on its postal account on opening deposits of £1,000. The account can only be managed via the post, but allows instant withdrawals of at least £1,000. It also guarantees to pay at least 0.25% above the Bank of England base rate.