Savings rates are now starting to fall across the board as banks and building societies anticipate that the Bank of England may soon start cutting base rates. Providers are maintaining the illusion of higher rates by launching accounts with short-lived initial bonuses. When they expire, savers will get a much lower return.
This bumps them up the best buy tables but may also be misleading.
Nine of the top 50 instant access savings accounts now rely on short-term bonuses to make a mark on the best buy tables, research from Investec Bank shows, up from just three 18 months earlier.
The average interest rate for balances of £5,000 was 4.94 percent but once those bonuses expired this dropped to just 3.27 percent.
On average, bonuses accounted for a third of the total return and as much as three-quarters in one instance.
The analysis reveals that the average size of the bonus on these accounts in October 2023 was 1.67 percent.
Eight of the nine bonuses lasted for 12 months, and one for 14 months.
After the initial period is over, savers must be ready to move on, said David Hunt, head of retail savings at Investec. “While bonus rates can be a good thing for savers in the short-term, it’s important to be aware of when they expire as the drop in interest can be substantial.”
He added: “This is particularly important as more best buy savings accounts are now using them.”
The truth is that banks are relying on the fact that many savers will not move on, and get a lower interest rate as a result.
There are a number of bonus accounts out there today.
Cynergy Bank, for example, offers a variable rate of 5.10 percent, but this includes a bonus rate of 1.10 percent that expires after 12 months.
The Santander Edge account, reserved for Santander Edge current account holders, has a market-leading headline rate of a stunning seven percent.
However, this includes a bonus rate of 2.50 percent for the first 12 months from opening. Thereafter the savings rate falls to 4.5 percent.
Santander Edge adopts another tried and trusted trick, which is only offering a high rate of interest on a limited amount of money. In this case £4,000.
Investec’s market-leading Online Flexi Saver pays a lower rate of 4.70 percent on balances of between £5,000 and £250,000, and keeps things clear and simple.
There is no initial bonus. Also, customers get instant access to savings, and can make unlimited deposits and withdrawals to a linked current account.
READ MORE: Yorkshire Building Society launches ‘competitive’ saver with 6% interest
There is nothing wrong with taking out a savings account that includes a bonus, if it secures you a higher rate at first.
Just make sure you know exactly what you are buying.
Savers must also beware other hidden traps, as a number of accounts will slash the interest rate you receive if you make more too many withdrawals in a set period.
The Earl Shilton Building Society Bonus One Account is currently flying high in the best by tables paying 5.13 percent.
The headline rate falls if you make more than just one single withdrawal in a year.
Again, that’s fine if you don’t plan to withdraw your money, but an issue if you do.
The Virgin Money Defined Access E-Saver pays 5.07 percent but that rate will fall if customers make more than three withdrawals during a calendar year.
Paragon Bank’s Double Access Savings Account cut its headline 5.05 percent rate if customers make more than two withdrawals in a year.
The important thing is to know exactly what you’re getting, before you take an account out. And be ready to vote with your feet it doesn’t do what you thought it said on the tin.
