The rate looks great and then it unravels

The interest on regular accounts is tempting, but not the tax and the catches, as Madeline Thomas reports
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The latest breed of regular savings accounts offer headline-grabbing interest rates, particularly Alliance & Leicester's 12 per cent – nearly double the best instant access or individual savings account (ISA) rate. But according to research, these accounts come with big strings. In fact, savers could be disrupting their entire banking for the price of a bottle of plonk.

Financial comparison site Moneysupermarket. com has provided figures for a basic-rate taxpayer saving £50 a month. If he put the money into First Direct, Lloyds TSB or HSBC's regular savings accounts, he would earn £20.80 in net interest after a year. Putting that same money into the top-paying instant access savings account would pay just £4 less a year: £16.80. Meanwhile, the top rate cash ISA would pay £19.66, and unlike the regular savings accounts, there are no restrictions on withdrawals.

Higher-rate taxpayers could earn more interest with an individual savings account than the regular saver because of the ISA's built-in tax efficiency.

The top four cash ISAs in the market all pay 6.05 or 6.0 per cent in interest, against an after-tax rate for all but one regular saver of 4.8 per cent, for higher-rate payers.

That exception to the rule is the Alliance & Leicester saver, whose 12 per cent deal is more than double the base rate and looks too good to be true. And indeed, when the accounts restrictions are factored in, it is.

For a start, existing customers can't benefit. The 12 per cent offer is only for new customers opening an A&L Premier current account – and that pays just 1.5 per cent.

Sue Hannums, savings manager with broker AWD Chase de Vere, says people should look at all the accounts they would have to move before being sold on the hype. "If they are just putting regular amounts in a normal savings account then, yes, this will knock the socks off what they've got. But in a lot of cases, it's not worth switching.

"You should look for the best current account for you rather than move for the savings rate. Otherwise, you could be shooting yourself in the foot."

The 1.5 per cent rate on A&L's Premier is well below the "best buy" current accounts, including A&L's own Premier Direct, which pays 8.5 per cent.

The next two providers on the regular savings leader board, First Direct and HSBC, only offer their 8 per cent deals to those with an accompanying current account – which in the case of First Direct pays no credit interest and charges a £10 fee if you do not bank at least £1,500 each month.

Kevin Mountford, Moneysupermarket's head of savings and current accounts, says banks now fight their battles in terms of who can best manage their margins, leaving customers to pick over the fine detail.

"The market has become price-led but in a very restricting environment. That can make the conditions so onerous for savers that often it's just not worth it."

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