How to find a more settled home for your savings

Bonus rates have pros and cons.

09:33 09 April 2013

Good news for savers has been scarce over the last few years - and with interest rates seemingly rooted at historically low levels, you might be tempted to save the bother and stuff your savings under the mattress instead.

 

But this would be a mistake. The first port of call for any saver should be a cash ISA, where interest is paid free of tax. If and when you've used your annual allowance (£5,760 for the 2013/14 tax year), you can start to look for a competitive savings account.

Unfortunately, there's a good chance that any account you find that gives a reasonable return on your money won't be paying such a decent rate of interest in a year's time - particularly if you choose an easy access account with a built-in bonus rate.

Bonus rates have pros and cons. On the plus side, providing the bonus rate is fixed, it offers some reassurance that your interest rate won't fall below a set level. But on the downside, bonus rates are only temporary and typically expire after 12 months. This means that your overall interest rate then plummets and you can quickly end up with an account paying next to no interest.

The only way to beat this is to move your money to a new account immediately. But doing this year after year can soon become a hassle.

So, if you've had enough of bonus rates and don't want to continually move your money from one account to another, it could be well worth opting for a savings account that's bonus-free.

 

Best-buy bonus-free savings accounts

 

If you are after a bonus-free account, the good news is that a lot of them are now sitting at the top of the best-buy tables.

It used to be the case that the majority of top-paying easy access accounts came with a bonus. But a quick look at the best-buy tables reveals that this is no longer the case. Out of the top 10 best-paying easy access accounts, just three of them have a bonus. A year ago, all of them had a bonus.

That said, the account at the very top of the tables (and open to everyone*) does have a bonus rate. The West Bromwich Building Society Direct Bonus Account pays an annual equivalent rate (AER) of 2.05% and comes with a 0.55% bonus until May 31, 2014. After this time, the rate will fall to 1.50%. You will need a deposit of £10,000 to open the account and you can only make four penalty-free withdrawals per year.

To give you an idea of how this compares, the table below highlights some of the best paying bonus-free savings accounts.

Account and provider	Annual equivalent rate (AER)	Minimum deposit	Withdrawal restrictions?	Access	Need to know
Nationwide e-Savings	2.00%	£1	5 withdrawals per year	Online	Must be a Nationwide current account holder
Manchester Building Society Platinum Easy Access Account	1.81%	£1,000	6 withdrawals per year	Branch, post
West Brom WeBSave Plus 3	1.80%	£1,000	1 withdrawal per year	Online
State Bank of India Instant Access Savings Issue 2	1.75%	£500	No	Online, branch, phone
Investec E-asy Access Account	1.75%	£25,000	No	Online, phone	AER drops to 0.50% for balances under £25,000
Scottish Widows Direct Transfer Account	1.70%	£1,000	No	Online, phone, post
GE Capital Direct GE Saver Issue 3	1.70%	£500	No	Online
Yorkshire BS Triple Access Account Issue 3	1.65%	£100	3 withdrawals per year	Branch, post
Chelsea BS Triple Access Saver Issue 3	1.65%	£100	3 withdrawals per year	Branch, post
Virgin Easy Access Saver Issue 6	1.55%	£1	No	Branch

 

Why choose a bonus-free account?

 

The advantage of all of the accounts in the above table is that you don't need to worry about your savings rate plummeting after a year.
If, for example, you had taken out the ING Direct (now Barclays Direct) Savings Account a year ago, it would have paid 3.03% with a 2.49% bonus for 12 months. But, thanks to the bonus expiring, the rate will have now sunk to just 0.54%.

And, as I explained in my recent article, if you had taken out the Halifax Online Saver account in March 2012 (as I did), which at the time was paying 2.80% AER, including a 2.70% bonus, that rate has now plunged to a paltry 0.10%.

If you have either of these accounts, act now and move your money to a better-paying account.

Of course, there's nothing wrong with taking out an account with bonus built in if you are happy to keep moving your money once the bonus ends. But if you're fed up with playing these games and you know you're more than likely to end up leaving your money where it is, it will be far more beneficial to choose a bonus-free option.

Be warned, though, that interest rates on all easy access accounts - including bonus-free ones - are variable, so could change at any time. You should therefore still keep a close eye on your savings rate and move your savings to a better home if necessary.

Another catch to watch out for is withdrawal restrictions. These are becoming increasingly common on easy access accounts - particularly the best paying ones. So if you know you will need regular access to your money, choose an account without these restrictions, even if this means you'll receive a slightly lower rate of interest.

Good examples are the State Bank of India Instant Access Savings account paying 1.75% or the Scottish Widows Direct Transfer Account paying 1.70%.

 

Cash ISAs

 

Finally, don't forget to make the most of your new tax-free ISA allowance from April 6. You can invest up to £5,760 into a cash ISA tax-free in the 2013/14 tax year. The table below highlights five of the best bonus-free easy access cash ISAs.

Account and provider	Annual equivalent rate (AER)	Minimum deposit	Transfer in from other ISAs?	Withdrawal restrictions?	Access	Need to know
First Direct Cash ISA	3.00%	£1	Yes	No	Online, phone, post
Vernon BS Triple Access ISA	2.50%	£10	No	3 withdrawals per year	Online, phone, branch
NatWest e-ISA	2.25%	£30,000	Yes	No	Online	Rate falls to 2.00% for balances under £30,000 and 1.75% for balances under £10,000
NS&I Direct ISA	2.25%	£100	No	No	Online, phone

 

*The Newbury Building Society and the Tipton & Coseley Building Society both offer easy access savings accounts at 2.10% but they are not available to everyone. To open the Newbury account you must have held an account with the building society for two years, and the Tipton & Coseley account is only available to those living in certain postcodes in the West Midlands.