The best interest rates come with strings attached

Savers need to read the small print before they put their money to work, as Alessia Horwich reports

The lot of a saver, although still a difficult one, is getting just a little bit sunnier. Savings rates have been inching up of late and, in a fortnight's time, millions of people aged over 50 will be allowed to shelter an extra £3,000 a year in an individual savings account.

However, banks aren't giving away the best rates for free: many accounts restrict flexibility with terms and conditions to outfox even the most vigilant saver or slap on a bonus rate and the account reverts to a pittance at the end of a relatively short period. If you have some money to put away, get out the magnifying glass as it's time to read the small print.

"There's been a shift towards more terms and conditions in the market," says Michelle Slade, a spokeswoman for online financial information service moneyfacts.co.uk. "These are making things much more difficult for your average saver." Beyond the headline interest rate there are many things savers need to take into account so they don't get stung.

Firstly, the best rates on the market are almost all solely for new money, not for existing customers. As banks turn increasingly to their savings books to fund their lending, they are offering big rates to entice customers, but if they've already got you, they aren't interested. "We've reached a stage where loyalty isn't rewarded," says David Black, a banking specialist for information service Defaqto. "The best deals are for those who have taken new accounts. If you stay with one bank the chance is you won't be getting near the best rate available." This essentially means an annual savings account shopping trip for consumers, because to get the best deals, you've got to be ready to switch.

This is even truer when you consider the bonus rates that make up a large proportion of the savings rates topping the best-buys tables. Bonus rates are added to the underlying rate for a set period (usually 12 months) allowing banks to offer top rates but for a finite period. Bonus rates are fine, but without them the rates offered are very low; to get a good return you have to change when the period is up. As Ms Slade says, "If you don't check it after 12 months you could find yourself left with an account paying virtually no interest and the benefit of having that account in the first place could be wiped out completely.

The names of savings accounts can also be misleading. Those looking for easy-access accounts need to watch out: although some accounts will technically allow savers to withdraw their money at any time, withdrawals can result in the sacrifice of a proportion, or the entirety, of their interest rate for that month. This is the case for the CitiBank reward saver, which pays no interest in a month when a withdrawal is made, or the First Direct bonus saver, which rewards savers with a conditional bonus only in months when they do not make a withdrawal.

Equally problematic for other savers is that some of the headline rates on the market currently restrict who can save with them by hiking up the minimum investment required. The Alliance & Leicester Online Saver Issue 5 pays 3.15 per cent, a competitive rate in the current market, and is flexible allowing unlimited withdrawals and 24-hour access online. However, the minimum investment is £1,000 which many simply won't have.

Savers also need to watch out for big rates offered on the condition that you buy other products from that bank. For example, the HSBC regular saver offers a preferential rate of 8 per cent to its HSBC Premier, Plus, Graduate Plus and Passport account holders. However these accounts cost from £4 per month, so if you don't need or use it you'll probably end up paying out more than the extra you earn in interest. Higher rates are attractive, but if the product that comes attached is not for you, or not the best example on the market, you could be much better off with a slightly lower savings rate and a more suitable product.

For those looking for a good-value, completely flexible account, there are offerings on the market that don't come with too many catches. The only string attached to the Citibank Flexible Saver at 3.3 per cent is the bonus of 2.25 per cent included in the rate for 12 months. "We listened to what our customers had to say," says Sharon Maguire, the head of wealth management at Citibank, "and it came down to clear and simple products that pay a good rate of return. This is what we've tried to do with this product." The Citibank account won't penalise for withdrawals and the minimum deposit is just £1.

An alternative is the ING Direct Savings account which pays 3.2 per cent on balances from £1 and offers unlimited withdrawals. However, the rate does last only 12 months, upon which it tumbles down to 0.5 per cent, which in 12 months could well be lower than base rate. In addition, ING has courted controversy in the past for failing to pass on Bank of England rate rises to customers.

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