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
Sunday 15 March 2009
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."
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