Dangerous savings accounts

Bonus rates on savings accounts might look appealing, but is there more to them than meets the eye?

These days, if you’re looking for a new easy access savings account, you’re bound to discover one thing most of them have in common – a bonus rate.

Having a bonus rate on your savings account isn’t necessarily a bad thing. After all, in the current climate where savings rates are generally looking pretty pathetic, it can be reassuring to have some kind of guarantee that the interest rate on your savings won’t fall below a certain level.

However, the problem with bonus rates is that they are only temporary, typically lasting for a year – after which point, the interest rate generally plummets. So this means that what initially might have been a competitive savings account is unlikely to be once that bonus rate expires. And unless you’ve been keeping your beady eye on your savings account, you may not realise it’s time to get switching.

But that’s not the only aspect about bonus rates that gets my goat. Irritatingly, some bonus rates on savings accounts aren’t even fixed. So even though the bonus rate is for a limited period only, because it’s variable, it could still change during that time – and let’s face it, in the current market any change in interest rate is likely to be a reduction.

Variable bonus rates

Personally, I really don’t see the point of savings accounts that offer variable rate bonuses.

Let’s say I sign up for a savings account with an overall interest rate of 2.50%, but it includes a fixed bonus of 2% for 12 months. The advantage of this is that even though the underlying rate on the account is variable, I know that for the first year, the interest rate can’t drop below 2% - because of the fixed bonus. And in a turbulent market, that’s pretty reassuring.

But if the bonus rate is variable, there’s no such guarantee. After all, as well as the risk that the underlying interest rate might change, there’s also the worry that the bonus rate could change. So, using the same example, if the underlying rate of 0.50% drops to 0.25%, and then the bonus rate falls to 1.50% before the end of the first year, I'll be left with an overall rate of 1.75% - which is a fairly significant reduction from the inital 2.50%. And don't forget, that's before the bonus rate period comes to an end.

Fortunately, the majority of easy access savings accounts offer fixed bonuses. However, the chart below highlights some of the accounts that offer variable bonus rates.

Easy access savings accounts and bonus rates

*Halifax/Bank of Scotland current account customers earn an extra 0.20%

Source: Moneyfacts

It’s worth noting that Halifax and Bank of Scotland don’t actually call their bonus a bonus. Instead, it’s called a ‘reward’. The reason for this is that there’s also a standard version of their reward accounts. So the Guaranteed Saver Reward Account temporarily offers an extra bit of interest on top of what you would earn with the Guaranteed Saver Account (which pays just 0.50% on deposits of at least £2,500) - so effectively, it's what I would call a bonus.

Cahoot doesn’t call the extra interest a bonus either. Instead, it simply states that the account has tiered variable interest rates - which depend on how much you have invested. However, if you ask me, it all boils down to the same thing. And the Cahoot account looks pathetic anyway.

What’s the point?

I decided it was time to ask one of the big lenders why it included a variable rate bonus on its account. So I asked Santander about its eSaver account.

Santander told me that having a variable rate bonus had enabled it to have more flexibility and to increase the bonus for existing customers. In fact, Santander says it has never reduced a variable bonus for existing customers.

Even so, personally, I would still prefer my bonus rate to be fixed. In an uncertain market, I'm sure I am not the only saver who wants a bit of a guarantee.

Best for bonuses

So if you're after a savings account with a fixed bonus rate, what are the options? The chart below highlights four of the best savings accounts with a fixed bonus rate.

Don't forget that with all of these accounts you will need to make a note in your diary to remind yourself of the date your bonus rate expires.

However, if none of the above accounts tickle your fancy, you might prefer the ING Direct Savings Account. I haven't included it in the chart because it's a little different. Although it doesn’t offer a bonus rate per se, the entire interest rate of 2.75% is fixed for the first year. So that rate is GUARANTEED for the entire 12 months. Of course, after that, you will still need to move your savings elsewhere because the rate drops to a pitiful 0.50%. But if you’re prepared to do this, I think the ING account is very competitive.

Best bonus-free accounts

If you’d simply prefer to avoid bonus rates all together, there are other options to consider. The chart below highlights four easy access savings accounts that don’t include a bonus.

*Halifax/Bank of Scotland current account customers earn an extra 0.20%

Source: Moneyfacts

Just be warned that unlike most savings accounts with bonuses, all but one of the accounts in the chart above have withdrawal restrictions. Unfortunately, these days, it seems that everything must come at a price!

More: Why saving is a sucker’s game | The banks you can’t trust