Savers pay the price for apathy when bonus period ends

Accounts offering high introductory rates can sting customers when the term expires
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One glance at the list of best buy savings accounts shows them to be dominated by providers paying an introductory or bonus rate for a set period of time – normally 12 months.

But experts say these accounts come with a big health warning, which is that apathy can cost you dearly. A decent bonus rate can easily push a savings account to the top of the pile, but what happens when this falls away? Some bonus interest rates represent as much as 90 per cent of the overall rate being offered and these accounts are rendered virtually worthless once the introductory period is up.

With banks and building societies currently unable to use Bank of England base rate changes to influence profits, manipulating accounts with bonus rates instead is proving a popular strategy.

"It could be disastrous for a provider's balance sheet to offer a premium gross rate from the onset if base rate stays where it is until 2014 and at the same time they are unable to reduce the rate without a reason," says Darren Cook from financial information site "An introductory bonus allows a provider to set a firm expiry date to what may look like a favourable rate at the time."

Savers are most likely to find a bonus rate on an instant access or notice account, rather than bonds. The biggest interest rate drop on the market is currently with the Dual Instant account from Stroud & Swindon building society which pays 3.25 per cent innitially but plummets to just 0.25 per cent once the 12-month, 3 per cent bonus comes to an end. Cash ISAs are also a target, with a 2.5 per cent bonus enhancing the Halifax Direct Reward ISA to 3 per cent and a 2.27 per cent bonus fixed until June 2012, bringing First Direct's Cash e-ISA up to 2.47 per cent.

The Post Office is another fan of bonus rates and has recently improved various accounts, including the 30-day notice Reward Saver which now pays 2.75 per cent and the instant access Online Saver which offers a healthy 2.9 per cent return. Both accounts are in the best buy tables but include a 12-month bonus of 1 per cent and 1.25 per cent respectively. The Post Office's other accounts are weighed down with even bigger bonus rates – the Instant Saver, which allows for only six free withdrawals per year, pays 2.1 per cent and the cash ISA pays 2.25 per cent, but both include a 2 per cent bonus for 12 months.

Variable introductory bonus rates are potentially an even bigger concern as they can change over time. Both Santander's eSaver and Flexible ISA, for example, include a variable-rate bonus up to 2.5 per cent which the banking giant is free to tweak, although this is an unlikely move and in the past Santander has only increased such bonuses for existing customers.

With so many of the top rates including a bonus, savers hoping to avoid them may find there is little else to turn to. Of the few "clean" instant access accounts, savers can get up to 2.5 per cent with Northern Rock's E-Saver (issue 3) and Barnsley BS's Online Saver, but both can be beaten by bonus rate accounts.

If providers rely on our inertia, hoping that once they've reeled us in with a decent bonus rate we will forget to switch down the line, the obvious answer is beat the banks at their own game. Generally, the bank or building society will give two months' written notice informing customers of any changes which is enough time to switch to a better account. However, if it is a non-payment account such as an ISA, or a bond, customers might be notified only if the drop in interest is significant so these accounts require more work.

"If it is a non-payment account, it is covered by Financial Services Authority (FSA) rules and you will be personally notified only where the change is considered of a 'material nature'," says Julie Smith, the head of savings at Fair Investment Company. 'Material nature' is defined by the industry as the rate falling in one go by more than 0.25 per cent and where the account balance is £500 or more, or if the rate falls by 0.5 per cent over the course of 12 months."

The good news is that savers with cash ISAs will soon be given more breathing space to switch after the Office of Fair Trading announced that guidelines have been amended to reduce the maximum period for completion of cash ISA transfers from 23 to 15 working days as of 31 December 2010.

For savers who do not trust themselves to switch accounts as often as needed, a more consistent savings account is the best bet, and this usually means a long-term fixed rate bond. David Black, a banking expert at analysts Defaqto, says: "A fixed rate bond that looks attractive now may not do so in two or three years' time, and early withdrawals from a fixed rate bond tends to be either expensive or not permitted. So invest funds only in a fixed rate bond which you know that you won't need for the duration of the term."

Expert View

Darren Cook,

"The number of products with an introductory bonus as part of their rate has been on the increase over the past couple of years. It seems to be a way that providers can offer inviting rates that are well above the base rate, knowing that they are only committed to it for a short period of time."

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