5 savings traps to avoid
Here's five to watch out for.
By Nicole Hamer |11:32 26 April 2013
Savers are getting a pretty raw deal right now thanks to low interest rates and high inflation. With the Consumer Prices Index (CPI)measure of inflation remaining at 2.80% in March, a basic rate taxpayer needs to find a savings account paying at least 3.50% to beat inflation, which - some tax-free ISAs aside - is frankly impossible.
However, rather than giving up on saving completely, it's still a good idea to put some money aside each month into an easy access savings account so you can get your hands on it quickly should emergency strike. Ideally, this should amount to between three and six months of your salary.
But, while easy access savings accounts should be straightforward, in fact, they can come with a number of traps. So, here's five to watch out for.
1. Temporary bonus rates
These days, most easy access savings accounts come with an initial bonus rate built in. Bonus rates temporarily boost the overall interest rate on the account and once they expire - typically after 12 months - the interest rate plummets.
Providing you are happy to move your money to a better-paying account as soon as the bonus rate ends, there's nothing wrong with applying for one of these accounts. But if you don't move your money once the bonus ends, you could end up earning next to no interest on your savings.
This is particularly the case if the bonus rate accounts for the majority of returns. For example, the Halifax Reward Saver pays an annual rate of 1.60% and has a bonus of 1.10%. Once the bonus expires, the interest rate will plunge to just 0.50%. So make a note in your diary to help you remember to move your money.
2. Withdrawal restrictions
When you apply for an easy access savings account you might assume, thanks to its name, that you will be able to access your money whenever you want to. But, in fact, some 'easy access' accounts limit the number of penalty-free withdrawals you can make each year.
Perhaps the worst example of this is the Furness Building Society Easy Postal Saver account, paying 2.00% on balances of £10,000 or more (1.20% on balances under this). With this account, if you make just one withdrawal, the rate reduces by 1.00%.
Meanwhile, the West Brom WeBSave Plus Account, paying 1.80%, allows you to make one penalty-free withdrawal per year, the West Brom Direct Bonus Account paying 2.05% permits four penalty-free withdrawals a year, and theNationwide e-Savings Plus account paying 2.00% permits five withdrawals per year.
So it's vital to check how many withdrawals you can make before you apply for an account. And if you know you'll need regular access to your funds, seek out an account that allows you to make unlimited penalty-free withdrawals - such as the Skipton Building Society Online Bonus Saver paying 2.00%.
That said, withdrawal restrictions can have their benefits as they will encourage you to leave your money untouched and only get your hands on it when it's really necessary.
3. A steep opening balance
When choosing which savings account to go for, make sure you check the minimum opening balance. Some accounts can be opened with just £1, but others require much higher initial deposits - in some cases, several thousand pounds.
For example, the West Brom Direct Bonus account paying 2.05% requires a deposit of £10,000, meaning it will be off-limits to many savers. However, there is a minimum operating balance of £1. So even if you have to withdraw £9,999 after you've opened the account, you'll still receive the 2.05% rate.
Be aware that some accounts also offer tiered rates of interest depending on the amount of money in the account. For example, the Tipton & Coseley Building Society Premier Access Postal Account pays the top rate of 2.10% on balances of £50,000 or more.
Balances between £49,999 and £25,000 earn 2.00%, balances between £24,999 and £10,000 earn 1.90% and balances between £9,999 and £5,000 get 1.80%. And your balance cannot fall below £5,000.
4. Postal operation only
Also watch out for easy access accounts that can only be accessed by post, such as the Tipton & Coseley Building Society Premier Access Postal Account, paying 2.10%, and the Furness Building Society Easy Postal Saver, paying 2.00%.
Getting access to your money by snail mail isn't exactly what I would call 'easy' or 'instant'.
5. Strict qualifying criteria
On top of all this, you may find that you will only qualify for an account if you live in a certain area or if you're already a customer with that particular bank.
For example, to open the Tipton & Coseley Building Society Premier Access Postal Account you must live in a certain postcode in the West Midlands or already be a member of the building society.
And to open the Nationwide e-Savings Plus account, paying 2.00%, you must already hold a Nationwide current account.
Catch-free accounts
If, after reading this, you're starting to wonder whether it's possible to find an account that's catch-free, I wouldn't blame you. But don't give up because they do exist!
The NS&I Income Bond, for example, pays 1.76% on balances above £500 and there is no bonus on the account. The account can be accessed online, by phone and by post and you can make as many withdrawals as you wish to penalty-free.
What's more, because NS&I is backed by HM Treasury, all of the money you invest in the account will be 100% secure. In comparison, when you invest your money in other UK banks, it is protected under the Financial Services Compensation Scheme (FSCS) which only covers up to £85,000 of savings per individual, per bank.
Another good option is the Scottish Widows Direct Transfer Account which pays 1.70% on balances above £1,000. Again, there is no bonus on the account and you can make withdrawals whenever you need to. The account can be operated online, by post and by phone.
Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.