It is more than a month since the Bank of England raised the base rate by a quarter of a percentage point to 4.75%, but most big banks are yet to pass on the rise to long-suffering savers. Chasing the best-paying accounts every six to 12 months may seem hard work, but if you have lots of cash on deposit, you probably should.
To stay on top, you need to be aware of the banks’ tricks and understand quoted rates so that you are comparing like with like. Banks quote one of two different interest rates, the gross rate and the AER, or Annual Equivalent Rate. The gross rate is the flat rate of interest that’s actually paid; the AER includes interest on the interest, which shows what you would get over a year if you put your money into the account and left it there.
If interest is paid annually the gross rate and AER should be the same, as there’s no interest compounding. When interest is paid monthly, the gross rate given is usually around 0.1% less than the AER rate. Remember, you also pay tax on any interest; 20% for basic-rate taxpayers and 40% for higher-rate payers.
One trick banks often use is to offer introductory ‘bonus’ rates to attract new customers, which only last a few months. If you’re happy to switch accounts often, that’s fine. But if you’re not, avoid them. Banks also often drop rates on savings accounts and simultaneously launch a similarly named high-interest account so you think you’re still earning decent interest, says Moneysaving expert.com – so know your account’s exact name.
Another tactic is to offer a headline-grabbing rate and then limit what you can save, or insist you open a current account too. Take Alliance & Leicester’s (A&L) new 12% Regular Savings account. It is ‘linked’, which means you also have to open a Premier current account (but you can’t open the Premier Direct account, which pays 6.1%). Since A&L only lets you save £10-£250 a month in the savings account, the most you could earn in one year is £156 after 20% tax, as long as you had built up savings of £3,000, says Justin Harper in the Daily Mail. Not bad, but the deal is inflexible and does commit you to opening a current account with A&L.
So which are currently the best, no-snags accounts? Top payer is the UK unit of Indian bank, ICICI. Its HiSAVE online account pays 5.15% on balances above £1 and will pay at least 0.25% above the Bank’s base rate until the end of 2007. It is still in the process of signing to the banking code, but is FSA-regulated. Other top accounts are Yorkshire Building Society’s Internet Saver Account, which pays 5.1% on £1 and up. For those who don’t like going online, Birmingham Midshires’ phone-based account pays 5% and guarantees to beat ING’s rate by 0.25% until 2008.