Don't fall for interest rate ruse

By SYLVIA MORRIS, THIS IS MONEY AND DAILY MAIL SAVINGS EXPERT
Updated:

 

Launching accounts with eye-catching rates of interest has long been a ruse used by some banks and building societies to bring in new savers. And while they pay 6% or more before tax on these flagship accounts, savers in older accounts earn much less.

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In some cases you can earn less than 1% before tax (worth just 0.8% after 20% savings tax), even on a substantial balance of £5,000. But these accounts which now pay miserly rates were top payers in their heyday. They, too, were used to lure in new savers. Then, over the years, the rates have been steadily pared so that savers earn lousy returns.

The savings industry is littered with erstwhile top-paying accounts which now pay laughable rates of interest. Among the worst offenders are the former building societies that now operate as banks. Accounts include Cheltenham & Gloucester's Cheltenham Gold, Abbey National's Instant Saver, Alliance & Leicester's Instant Access, Bristol & West's Premier Saver, Northern Rock's Instant Access and Woolwich's Prime Gold.

Former City worker Susan Hollingworth, from Saffron Walden, Essex, was horrified when she learned of the poor interest rate she earned on her Abbey National Instant Saver account. Nearly three years ago, the bank launched its latest version of this account 'to position it more clearly as a genuine savings account'. It then paid 3.7% (2.98%) on balances of £5,000 plus, when the base rate was 7%. Now it pays just 1%, against a base rate of 6%.

Abbey National savers have seen a drop of 2.7% against just a 1% fall in the base rate over the three years. Ms Hollingworth says: 'It's an instant loser account. Why call it a savings account when it pays less than the rate of inflation? I have closed my account.'

Savers with up to £5,000 can earn as little as 0.5% before tax - or £20 interest a year after 20% savings tax - or £78 at best. All six banks have better deals for their newer savers. By switching to a top-paying account of 6% or more, savers can boost their interest to £240.

Savers who signed up for accounts which offer a rolling bonus payable for the first six or 12 months also need to check their rates.

Alliance & Leicester's postal accounts, Access Direct and 60 Direct pay a 0.5% bonus but only for the first year after you open your account.

Savers who have been in Access Direct for more than 12 months earn just 4.8% before tax (worth 3.84% after 20% savings tax) on £5,000 if they make more than three withdrawals a year.

This is below the 5.5% (4.4%) they can earn in the bank's card-based EasySaver account, which has no withdrawal restrictions.

And don't expect you are getting a good rate just because you are in a postal account. Some of these onetime top-payers have ended up in the financial backwater to make room for newer accounts run over the telephone or internet. With the Northern Rock Select Access account, once a toppayer, savers earn 0.35 to 1% before tax (0.28 to 0.8%) on up to £40,000.

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