Personal Finance: Save yourself from the tyranny of the high street

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The Independent Online
IF YOU want your savings to earn a competitive rate of interest, it may be worth investigating the possibility of opening an independently pegged savings account.

Quite simply, these are deposit accounts where the rate of interest payable to investors is linked to an independent yardstick, such as the base rate set by the Bank of England's Monetary Policy Committee.

In comparison, the interest rate on managed accounts, which comprise the vast majority of savings accounts, is controlled directly by the bank or building society offering the account.

The use of an independent yardstick means that there is no scope for interest-rate manipulation by financial institutions at your expense. In the past, investors have been attracted by high headline rates on a new savings account and piled in with their hard-earned savings. Then, when the bank or building society decides it has taken enough in deposits, the rate of interest slowly drops relative to the best rates on the market.

While some investors may keep a check this rate of interest, the majority of savers don't bother. Institutions know they can rely on investor apathy to give them cheap funds to source lending for mortgages or commercial loans.

Another cavalier ruse is to delay passing on interest-rate rises, while cutting rates immediately when interest rates drop.

This year has seen an Office of Fair Trading warning to the Northern Rock over its attitude to savers. The former economic secretary to the Treasury, Helen Liddell, has also warned banks over their treatment of savers. A new voluntary code from the British Bankers Association is expected to address the issue.

Independently pegged saving accounts prevent institutions from committing these abuses, but they are still relatively rare. The Close Brothers merchant bank offers the Treasury account. Launched two years ago, this is pegged to the London inter-bank bid rate (LIBID rate), which is defined as the LIBOR rate (London inter-bank offered rate) less one eighth of a percentage point.

Interest is paid gross monthly and is based on the prevailing LIBID rate on the first working day of the month. For August, one month's interest at the LIBID rate of 7.5 per cent on August 3 will be paid to investors on 1 September.

However, there are drawbacks. The minimum investment in the Treasury account is pounds 50,000, and secondly, investors can only withdraw money at the start of a month, after giving notice by the last working day of the previous month.

For those with less to invest, Close Brother's Crystal account has a minimum balance of pounds 5,000. It is pegged at base rate less a half per cent, which gives a current rate of 7 per cent. Seven days' notice must be given for any withdrawals.

So far, Close Brothers is the only bank to offer a retail savings account linked to an independent target, although several building societies offer products which guarantee to match or beat base rate for a limited period.

The Skipton Building Society's base rate tracker account has a minimum balance of pounds 5,000 and promises to pay an interest rate equal to base rate on investments up to pounds 24,999 and a quarter per cent over base rate if pounds 25,000 or more is invested.

Access to the account is also limited to 14 days following any changes in base rate, and the account is only running until 31 December 1999.

The investment adviser, Chase de Vere, has just teamed up with the Newcastle Building Society to launch the Base Rate Plus Bond. This promises to pay investors 8.01 per cent gross for the next 12 months. The investment is moved to a 30-day notice account after 12 months, with the interest rate guaranteed to be above base rate for a further 18 months.

The big players do not offer independently pegged accounts because there is little demand for them. A Halifax spokesman said: "We try to provide good quality accounts with mass appeal. If there was a demonstrable demand for a product we would certainly do it."

A cynic would say that with an ordinarily managed savings account, institutions have more leeway to control the margin between their borrowing and lending rates.

Chase de Vere's Justin Modray says: "The banks and building societies would not want all their funds in base-rate tracker accounts as it would make their margins too tight."

The self-perpetuating cycle of financial institutions only offering savings products that suit them (on the grounds that there is no demand for new savings products) may be coming to an end. The Cater Allen private bank has just dipped a toe into the water with its Special Reserve account - a high-interest cheque account with an interest rate guaranteed at 1 per cent below base rates. However, Cater Allen only offered the account to a small number of independent financial advisers for two months to test the idea.

Other banks are starting to align the deposit rates to outside influences. Royal Bank of Scotland now has a "rate watch" on three savings accounts, linking its interest rates to the rates offered by four of its closest competitors.

More significantly, the supermarkets have been very successful in winning funds by offering simple instant access accounts with high rates of interest. If they decide an independently pegged savings account - with low margins and a clear interest-rate calculation formula - would appeal to investors, then perhaps the rest of the high street banks and building societies would have to follow suit.

Matthew Craig is deputy editor of 'Pensions Management'