Get a guaranteed return on your savings
Do you want a guarantee that you'll continue to earn some interest on your savings for at least a year or don't you? Some people give surprising answers.
If you're searching for a savings account for your emergency and rainy-day savings, and you find that one offers a good rate of interest that's fixed for 12 months and combined with easy access, you'd take it. You'd be silly not to. The rate won't be reduced inside 12 months, which is what banks love to do, but you can access your money at will, or even move it to another account without penalty, in the event that a better one shows up.
Those sorts of accounts are few and far between, since most easy-access accounts offer variable rates of interest, not fixed. Hence, it's generally accepted that these rarer accounts are good choices.
What puzzles me – and what is the subject matter of this article – is why the more common type of savings guarantee is scorned by both journalists and readers alike. I'm talking about fixed savings bonuses. You know: when a savings account says it'll pay, e.g. 2.5% interest including a 1.5% bonus for 12 months. Many complain that, when the bonus disappears in just one year's time, you'll be getting a pathetic rate of interest (or even more pathetic, depending on your point of view).
That may sound like a reasonable complaint, but I'll tell you why it's wrong.
The birth of bonuses
Until recently, savings bonuses were a rarity amongst the best savings accounts. They've become particularly abundant since November 2009, when the Financial Services Authority (FSA) got the banks to start being more up front with customers about reductions they make to variable interest rates.
Bonuses give the banks a new excuse to reduce rates suddenly. It appears likely that many customers who have switched to top-paying accounts from late last year will start seeing sharp reductions from November 2010, as their bonuses are removed.
Inflation is the enemy when it comes to your savings because it attacks real returns, and reduces the purchasing power of your cash.
The alternative is worse
That's just another banking practice to leave a sour taste in the mouth, but let's consider the alternative.
Take a look at Barnsley BS Online Saver Issue 2, which is an easy-access account paying a variable 2.5% per year. It has no savings bonus, so the Society can close the issue to new customers when its reached its target for deposits and begin a process of reducing rates immediately. It doesn't have to give a reason for doing so, and it can reduce rates as quickly and regularly as it likes. There's nothing to stop it and this is normal practice at most or all banks, most of the time.
Compare this with Egg Savings Account Issue 2. This also pays 2.5% variable, but the difference is that Egg's account includes a 2% bonus lasting 12 months. It would be sensible for savers opening this account to assume that some time during the next 12 months Egg will want to reduce the interest paid by as much as 0.5%. However, unlike Barnsley, it's not allowed to reduce the interest rate any more than that amount during the first year, because it has promised to pay a fixed bonus of 2%.
Which will work out better?
Banks have undoubtedly started offering more bonuses to minimise the damage of the new November 2009 rules. Banks will now also be obliged to remind customers when their bonuses are about to vaporise, but they can use those letters to remind customers that they had in fact told them all about it from the beginning. It won't sound so harsh that way.
Recent question on this topic
- gaiamaterre asks:
Meanwhile, the accounts without bonuses will presumably continue to make cuts, and even sometimes big cuts – and they won't have to wait 12 months to do so.
Or, perhaps, bonus-free accounts won't suffer so many cuts any more, because that will mean writing letters to customers without the softening benefit of a friendly 'I told you so'. However, my opinion is that this minor customer-relations challenge won't stop banks from reducing rates below where they would otherwise be if there was a decent guarantee.
We'll know more come November 2010. In the meantime, it makes sense to act on the information we've got. We know banks like to reduce rates as soon as they can and by as much as they can, and we know that if there's a savings bonus we're guaranteed to be paid at least some interest during the whole bonus period. Hence, we should be looking for accounts that don't just have high interest rates, but also have savings bonuses.
Watch out for the wrong sort of bonus
I'll end with another comparison of two accounts, both paying the same rate of 2.75%, getting them into best buy territory. The first is the Post Office Online Saver, which has a savings bonus of 1.25%. The second is Santander eSaver Issue 2, which has a savings bonus of 2.25%.
Santander seems like a better buy because of its higher savings bonus, but the Post Office's bonus is fixed – which is normal – whereas Santander's is variable. Therefore, Santander can reduce the savings bonus as and when it likes, meaning it can cut the interest rate as fast and low as it likes at any time, even right down to zero. But savers with the Post Office know they'll earn at least 1.25% for a year.
In other words, Santander's bonus of 2.25% is 100.00% useless. Currently it's the only bank I know using this particular booby trap, but keep an eye out for such tricky small print.
Fixed bonuses certainly have value, but if you want to guarantee your return won't change over a year, consider the ING Direct Savings Account. Here you'll earn a competitive fixed rate of 2.75% for 12 months. It's not a bonus as such but it does promise a minimum return, and provides instant, penalty-free access. Just bear in mind, after the fixed rate period, the rate will drop to the ING Direct Savings Account variable rate which is currently just 0.5%.
Compare the Post Office account with other top savings accounts through Lovemoney.com