Liberate your cash: penalties are so passé

It used to make sense to tie up your savings for a set period in order to be rewarded with a higher rate of interest.

It used to make sense to tie up your savings for a set period in order to be rewarded with a higher rate of interest.

Well, not any more.

The principle that a notice account would always pay more than an instant access account has been eroded by fierce competition in the online savings market.

You can now earn the same - if not better - rates in an instant access web account, with no penalties if you need to get hold of your money in a hurry.

On average, the top six notice accounts pay 5.2 per cent - a whisker more than the 5.1 per cent average at the best six internet instant access ones.

Yet these figures are misleading, claims the financial comparison service MoneyExpert. It points out that four of the top six notice accounts include bonuses that run out after six months or a year, while rates on others are as low as 1.35 per cent - even on savings of more than £5,000.

"Some notice accounts pay good rates," says MoneyExpert's spokesman, Sean Gardner. "But the days when you had to accept conditions to receive the best rates are long gone."

At present, the top-paying notice account is from Universal building society, with interest at 5.5 per cent. But this includes a bonus rate of 0.5 per cent for the first six months. To avoid penalties, you must tie your money up for 120 days.

Heritable Bank is paying 5.25 per cent on its 90-day notice account - but that includes a 0.5 per cent bonus for the first six months.

"Notice accounts are something of a dying breed," says Susan Hannums from independent financial adviser (IFA) Chase de Vere. "There is so little difference between the rates on these and instant access accounts that you have to ask, what's the point?"

For example, Alliance & Leicester's Online Saver instant access account is paying 5.35 per cent, while First Direct's e-Savings pays 5.2 per cent with instant access.

If you don't want an internet account, Ms Hannums suggests Lambeth building society's instant access account, with interest currently set at 5.16 per cent. Note, however, that this includes a 0.25 per cent bonus for six months.

"With an instant access account, you can also take your money out and move it elsewhere to chase the best rates," Ms Hannums adds.