So many savings accounts come with catches these days... Here's what you need to look out for.
If there's one thing that really annoys me about savings accounts, it's when they come with catches. It can be hard enough trying to choose the right savings account in the first place, but when complicated catches are thrown into the bargain, selecting a savings account becomes extra tricky.
So to give you an idea about what you should be looking out for and avoiding, I'm going to run through some of the most common catches out there.
Bonus rates
Bonus rates on savings accounts aren't necessarily a bad thing. But they are certainly something you need to be aware of. The trouble with bonus rates is that they temporarily bump up the rate - usually for a year. After that, you'll probably find that the interest rate on your account drops so far it becomes a pretty rubbish account.
Which means, if you're going to take out a savings account with a bonus rate, you need to be prepared to switch as soon as the bonus comes to an end.
I'm not going to condemn bonus rates completely because I believe they've played a very useful role for savers during the current uncertain economic climate. After all, they've provided a guarantee that the rate of interest you receive won't fall below a certain level. So if your bonus rate is 2%, you know you'll get at least 2% for the first year - and that can provide a great sense of security.
That said, this only applies if the bonus rate is fixed. If it's a variable bonus, that sense of security vanishes. The Alliance & Leicester Online Saver 5 Account, for example, offers a variable rate of 3.15% AER, but this includes a variable rate bonus of 2.65% on balances under £25,000*. A variable bonus on a variable rate? I really don't see the point of this - except that it allows Alliance & Leicester to justify suddenly dropping the rate in a year's time. But then, it could do that at any time, anyway.
The moral of the story is: if you're going to pick an account with a bonus rate, make sure it's fixed. The Birmingham Midshires Telephone Extra Account offers exactly the same rate of interest as the Alliance & Leicester account, only this time the bonus rate of 2.65% is fixed for the first year. So you know you'll get at least that rate for the entire year. Just bear in mind you can only access this account by telephone!
Withdrawal limits
Savings accounts that are called easy access but then have the audacity to limit the number of withdrawals you can make really get my goat. If you go over your withdrawal limit, you'll either have to pay a fee or your interest rate will go down.
The Sainsbury's Finance Internet Saver Account, which offers a competitive rate of 2.80%, is marketed as an easy access account. Yet it will only allow you to make three withdrawals in the first year. Make more than this, and you'll be put on the standard Internet Saver rate which is currently 0.75%. Rubbish - and hardly 'easy access'!
If you're looking for a genuine easy access account that really is easy access, you're much better off plumping for the ING Direct Savings Account. This offers a competitive rate of 3% fixed for 12 months - and allows you to make as many withdrawals as you want.
Fund limits
Another aspect to be aware of is that some savings accounts will penalise you for going over or under a certain fund limit. Once again, the Sainsbury's Finance Internet Saver Account gets the thumbs down in this category, as if your funds go below £1,000 or above £500,000 in the first year, the rate of interest will drop to 0.75%.
Age restrictions
Keeping an eye out for age restrictions is also a good idea. SAGA is currently offering some competitive fixed rate bonds at 3% for 12 months and 4.15% for two years. But before you get too excited and apply, make sure you're aware that you must be aged 50 or over to qualify.
Linked financial products
Abbey's Super Fixed Monthly Saver is a regular savings account offering a market-leading fixed rate of 6% AER for one year. To qualify for this rate you need to pay in £20 to £250 a month, and resist making any withdrawals. With an interest rate that high, this sounds pretty tempting.
There's just one problem. You also need to open a new Personal Protection Plan, regular premium investment or pension with Abbey. In other words, you'll have to make a big commitment to Abbey, which could involve exposure to the stock market. And all because you want a good rate of return on your savings.
So unless you're planning to take out one of these products anyway, I'd steer clear.
It's also worth watching out for savings accounts that require you to have a current account with the same lender - such as the Lloyds Monthly Saver account.
The best accounts
So what's the best, catch-free savings account? Overall, I think the ING Direct Savings Account is the winner. As mentioned above, this account offers a fixed rate of 3% for 12 months and you only need £1 to open it. It's truly instant access, too.
I haven't found another account like it - in other words, one that offers a guaranteed return and allows you to withdraw your funds whenever you want. The only drawback is that it is only available to new customers.
Alternatively, if you'd prefer to maximise your interest rate and are prepared to lock up your funds, the Cheshire Building Society is offering a one year fixed rate bond at 3.75%. However, you'll need at least £1,000 to open the account.
If you're prepared to tie up your funds for two years, the AA Internet 2 Year Fixed Rate Bond is offering a fixed rate of 4.35% and you'll need a minimum investment of £500.
So when you next decide to apply for a savings account, make sure you read the terms and conditions fully and don't get caught out!
*Whatever your balance, you are guaranteed a 1.65% variable bonus.
More: Get the best rate on your savings | July's top seven savings accounts