Lots in store for small savers with Tesco

Tesco will tomorrow launch a top-rate instant access savings account which will add to the pressure on banks and building societies to raise their rates.

The account, Tesco Savings, pays a flat 6.5 per cent on all balances, even those as low as pounds 1. Savers can pay in or withdraw cash at Tesco's checkouts and can also use Royal Bank of Scotland and the supermarket's own cashpoints; cheques can be paid in by post. From November, savers will also be able to use Link cashpoints.

There is also an attractive introductory offer: savers who open accounts this year and keep an average balance of pounds 500 or more in their accounts for the first three months will receive 1,000 free points on a Tesco's Clubcard. These loyalty card points can be swapped for pounds 10 of shopping at Tesco and give an extra 2 per cent return on a pounds 500 balance.

The 6.5 per cent rate matches that of a similar account run by Sainsbury's Bank and is far higher than that offered on most accounts offering free and immediate access. The new Tesco's account carries the guarantee that it will pay a better rate than the average on instant access accounts from Nationwide, Halifax, Woolwich, Abbey National and Barclays for pounds 5,000, but with these paying 4 per cent or less, this guarantee doesn't amount to much.

The account should be distinguished from Tesco's existing Clubcard Plus, which is a budgeting arrangement for spending at Tesco. Savers will be able to set up direct debits and standing orders but there is a limit of six free withdrawals a quarter - any more will cost 50p a time.

Tesco and Sainsbury's look particularly attractive for low-balance savers, who in most cases can no longer walk into a building society to open a new account. Most societies have hiked up their opening balances to new customers to discourage windfall seekers. The rates offered by thenew accounts also raise doubts about claims by societies that they pay more because of the "advantage" of their mutual status.

Savers with instant access accounts with building societies who would otherwise stand to gain from switching may be put off because of the windfall potential of their existing account. They should consider other accounts offered by their building society that offer higher rates. For example, Nationwide's InvestDirect account pays 6.7 per cent on as little as pounds 500. To withdraw InvestDirect savings at no charge will take longer than a week by post, although for immediate access for 50p you can use a Nationwide cashpoint. In future Nationwide may also allow savers to operate the account by phone. This facility, which is the way that another top-payer - C&G's Instant Transfer - runs, would allow withdrawals within three days.

For a full listing of Best Savings Rates, see the table on page 15.