New top easy access savings account beats the bonds!

by Jane Baker on 05 November 2010  |  6 comments
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Check out the new best-buy easy access savings account and discover why it's a better bet than a one-year fixed rate bond.

The whole point of locking your savings away in a fixed rate bond is to get your hands on a better return than you would get from an easy access savings account. But when the rates on the best-buys for each type of account are virtually identical, tying your cash up becomes a lot less attractive.

Give bonds a miss

Look at it this way: The top one year bonds from Barnsley Building Society and Northern Rock pay a fixed return of 3.05%. But, the new Nationwide MySave Online Plus account gives savers access to their cash and pays a market-leading rate of 2.99% (variable).

This is just a tiny fraction behind the return generated by the bonds. And, personally, I don’t think an extra 0.06% in interest compensates for giving up the opportunity to withdraw from the bond until it reaches maturity in 12 month’s time.

After all, in terms of hard cash, you would earn a total of £152.50 in interest over a year if you put £5,000 into a bond paying 3.05%. But if you put that same amount into the Nationwide MySave Online Plus account instead, the return would be £149.50. In other words, by choosing the bond you would only get a miserable £3 extra for your trouble, even though your cash is out of bounds for the term.

Another reason to give bonds a miss

There’s another reason I don’t think one year bonds are a good bet right now. In the current ultra-low interest rate environment, a fixed rate of around 3% may look pretty reasonable. After all, when the base rate is still firmly stuck at its all-time low 0.5%, it’s totally unrealistic for savers to think they can get anywhere near pre-financial crisis one year bond rates of 6% or 7%.

Throughout the year, most economists have stood firm in their belief that interest rates will stay low for the foreseeable future. But the tide appears to be turning. With recent data from the Office for National Statistics revealing that the UK economy is currently growing at its fastest pace for a decade, some experts are beginning to predict that rates might start to rise sooner than we had originally anticipated.

Let’s assume for a moment this theory takes hold. If the base rate begins to climb, savings rates across the board should start to improve. That means new issues of fixed rate bonds could start to offer returns which are more generous than those available on the market today. If you took the plunge and fixed into a rate of around 3% now, you might live to regret your decision if bonds launched in the near future pay healthier rates.

Having said that, it’s very difficult to tell when or even if interest rates might start to move up in the short term. After all, the impact of the coalition’s spending cuts has to be factored in which could hamper recovery for some time.

What we do know for sure is that putting money in a bond always involves taking a gamble on whether the fixed rate will remain competitive compared with new bonds and other variable rate accounts that come onto the market. But the guaranteed returns available on the best short-term bonds just don’t seem to make that risk worthwhile.

Recent question on this topic

• denbow6 asks:

  when the bank states interest paid either monthly or yearly how does this work and which is best

  • 
    MikeGG1 answered "Which is best would depend on the AER (Annual Equivalent Rate). It is usual for both AERs to be..."
  • 
    JoeEasedale answered "If the AER is the same then Monthly interest would better as you would then get interest on..."
  • Read more answers

Go for easy access instead

With all this in mind, let’s take a look at Nationwide’s top account in more detail. Savers will need a minimum of £1,000 to get started. As I mentioned earlier, the account pays a market-leading rate of 2.99%. This includes a fixed bonus of 1.45% for 12 months which guarantees savers a minimum return. After the bonus has disappeared, the account will revert to a standard rate which is currently 1.51%.

It’s true you won’t get a guarantee for the full rate in the same way that you do from a bond. But if the return from the Nationwide MySave Online Plus account begins to slip, you’ll always have the opportunity to switch your savings.

Remember, you won’t get this flexibility with a bond which you’re usually stuck with until it matures. You can also top up the Nationwide account with extra cash as often as you like. But once again, you won’t get this option if you decide to take out a bond given that your total deposit must be made on day one and can’t be added to later.

Despite all the positives there is one major drawback with MySave Online Plus: You can only make one penalty-free withdrawal per year. You can, however, make unlimited withdrawals thereafter, but you’ll lose the bonus and receive a lower rate of just 0.10% for the month in which the withdrawal takes place. Clearly, this account has been designed with savers who actually want to build up a decent cash cushion in mind.

Of course, there are plenty of easy access accounts which offer countless penalty-free withdrawals, but the rates can’t quite compete with Nationwide. The next best account, which allows you to dip into your savings without notice or penalty, is the Post Office Online Saver but the rate on offer is lower at 2.90%.

Compare savings accounts at lovemoney.com

More: New market-leading easy access savings account | Ditch these ‘best buy’ savings accounts – now!