Gone in the fluttering of an eyelash. The rates that draw you in ... then disappear

As banks sweeten meagre savings deals with introductory bonuses, Kate Hughes and Julian Knight see how consumers can win

They tell us to be prudent but what's so wise about putting money away when the average savings account now pays less than 1 per cent per year? On a deposit of £5,000, that's less than £50 a year – a sobering thought for consumers as the deadline looms for paying into a cash individual savings account (ISA).

As the search for a decent interest rate becomes desperate, banks and building societies are resuscitating a long-dormant tactic – offering an introductory bonus to new savers.

For the financial institutions, there is a compelling business logic for offering an introductory bonus: for a relatively small spend, they can climb the "best buy" tables and hopefully attract new deposits. And when the bonus comes to an end and the account starts to pay much less, they are betting that not too many account holders will go elsewhere.

This tactic has been with us for many years, but in the current low-interest-rate environment – where fractions of a per cent really matter to marketing departments and savers – it has come back to the fore. According to research firm Defaqto, the number of accounts offering an introductory bonus has jumped by half in the past two years. What's more, the size of the bonuses on offer has gone up as banks and building societies look to stand out from the crowd.

The most striking example comes from Egg, whose variable-rate saver offers a market-leading pay rate of 3.35 per cent. But this includes 2.1 per cent for the first year, before dropping to a basic rate that currently stands at just 1.25 per cent.

Such high introductory bonuses leave the firms that compile best buy tables with a something of a dilemma. "We don't put Egg in our tables because we believe that this is too chunky an introductory bonus. The drop-off in the rate is too sharp," says Michelle Slade at financial analyst Moneyfacts. "The main problem is that banks and building societies don't have to tell customers when the bonuses fall away. The onus is on the customer to notice when they start receiving a substantially lower rate," she adds. This is very different to the legal position with accounts that have a guaranteed rate in place or standard savings accounts. In these cases, the provider is obliged to write to the customer to warn that the pay rate is about to change.

The best buy for a standard easy-access deal with a consistent interest rate is Nationwide's e-Savings Plus at 2.5 per cent, followed by ICICI bank's HiSave at 2.45 per cent and Birmingham Midshire's e-Saver at 2.35 per cent. Bear in mind, however, that many accounts are expected to cut their rates in the coming weeks in the wake of the latest base-rate reduction.

It's not just instant and easy-access accounts that are pursuing this tactic. Some 28 notice accounts, 22 cash ISAs and three regular monthly savings deals currently offer an introductory bonus.

David Black, banking consultant at Defaqto, argues that quick-thinking consumers could use this craze to their own advantage. "With the Bank of England base rate so low, it now makes sense to have a look at the accounts offering an introductory bonus. But savers must put a reminder in their diary for around the time the bonus ends, so they can look for an alternative.

"As always, it is important to study the terms of the account as some may limit the number of withdrawals permitted," he adds.

Ms Slade echoes the point that savers can play the system. "This could be a good way of getting a competitive rate from the bigger institutions," she explains. "But there is no requirement for banks to tell you when the rate changes, so you really have to be on the ball and prepared to switch as soon as the introductory deal comes to an end. If not, you could find that, overnight, the rate on your savings becomes one of the lowest on the market."

And if interest rates go up again quickly, you could be left behind, especially as many of these savings deals impose penalties if you take your money out within the introductory period.

"If an account has an introductory rate, you are often committed to keeping the money in that account for a year or more," warns Keith Churchouse of independent financial adviser Churchouse Financial Planning. "But base-rate cuts and other strategies are putting increasing pressure on inflation, which could force up interest rates in the next 12 months. So savers should think carefully about tying up their money right now.

"Sadly, there are few places consumers can go for decent savings rates apart from these introductory offers," adds Mr Churchouse. "But it could be worth splitting your cash between a top-rate fixed deal and an instant-access account so you don't miss out later on."

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
SPONSORED FEATURES
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Sales Adviser - OTE £24,500

    £22500 - £24500 per annum: Recruitment Genius: Inbound and outbound calls with...

    Recruitment Genius: Business Development Executive / Sales - OTE £40,000

    £18000 - £40000 per annum: Recruitment Genius: This fast growing Insurance Bro...

    Guru Careers: Research Associate / Asset Management Research Analyst

    £40 - 45k (DOE) + Benefits: Guru Careers: A Research Associate / Research Anal...

    The Green Recruitment Company: Graduate Energy Analyst

    £20000 Per Annum: The Green Recruitment Company: Summary: The Green Recruitm...

    Day In a Page

    Turkey's conflict with Kurdish guerrillas in Iraq can benefit Isis in Syria

    Turkey's conflict with Kurdish guerrillas in Iraq can benefit Isis in Syria

    Turkish President Erdogan could benefit politically from the targeting of the PKK, says Patrick Cockburn
    Yvette Cooper: Our choice is years of Tory rule under Jeremy Corbyn or a return to a Labour government

    Our choice is years of Tory rule under Corbyn or a return to a Labour government

    Yvette Cooper urged Labour members to 'get serious' about the next general election rather than become 'a protest movement'
    Singapore's domestic workers routinely exploited and often abused in the service of rich nationals

    Singapore's hidden secret of domestic worker abuse

    David Cameron was shown the country's shiniest veneer on his tour. What he didn't see was the army of foreign women who are routinely exploited and often abused in the service of rich nationals
    Showdown by Shirley Jackson: A previously unpublished short story from the queen of American Gothic

    Showdown, by Shirley Jackson

    A previously unpublished short story from the queen of American Gothic
    10 best DSLRs

    Be sharp! 10 best DSLRs

    Up your photography game with a versatile, powerful machine
    Solved after 200 years: the mysterious deaths of 3,000 soldiers from Napoleon's army

    Solved after 200 years

    The mysterious deaths of 3,000 soldiers from Napoleon's army
    Every regional power has betrayed the Kurds so Turkish bombing is no surprise

    Robert Fisk on the Turkey conflict

    Every regional power has betrayed the Kurds so Turkish bombing is no surprise
    Investigation into wreck of unidentified submarine found off the coast of Sweden

    Sunken sub

    Investigation underway into wreck of an unidentified submarine found off the coast of Sweden
    Instagram and Facebook have 'totally changed' the way people buy clothes

    Age of the selfie

    Instagram and Facebook have 'totally changed' the way people buy clothes
    Not so square: How BBC's Bloomsbury saga is sexing up the period drama

    Not so square

    How Virginia Woolf saga is sexing up the BBC period drama
    Rio Olympics 2016: The seven teenagers still carrying a torch for our Games hopes

    Still carrying the torch

    The seven teenagers given our Olympic hopes
    The West likes to think that 'civilisation' will defeat Isis, but history suggests otherwise

    The West likes to think that 'civilisation' will defeat Isis...

    ...but history suggests otherwise
    The bald truth: How one author's thinning hair made him a Wayne Rooney sympathiser

    The bald truth

    How thinning hair made me a Wayne Rooney sympathiser
    Froome wins second Tour de France after triumphant ride into Paris with Team Sky

    Tour de France 2015

    Froome rides into Paris to win historic second Tour
    Fifteen years ago, Concorde crashed, and a dream died. Today, the desire to travel faster than the speed of sound is growing once again

    A new beginning for supersonic flight?

    Concorde's successors are in the works 15 years on from the Paris crash