Three little words that mean so much

By SIMON MOON
Updated: 08:22 EST, 4 August 2005

NEWS that interest rates have been cut for the first time in two years will be welcomed by housebuyers, beleaguered retailers and industrialists. One significant group, however, will not be cheering.

Savers, particularly those who rely on monthly interest accounts to supplement fixed incomes, have had a tough time of it since rates began falling worldwide in the wake of the September 11 attacks in the US. At their lowest point, UK rates touched 3.5% in July 2003, but had been rising slowly ever since.

Many banks and building societies did not bother to wait for today's cut from 4.75% to 4.5%. They had already been quietly trimming the interest on their savings accounts. And it remains to be seen if they will take a second bite out of their rates, so savers must be on their guard.

Finding a top-paying savings account is not as simple as it should be. A close look at best-buy tables in newspapers and online reveals that many market-leading accounts will be paying their high rate only for a few months. After that the rate will be slashed and the account will fall down the rankings to join the also-rans.

You could spend an age studying the small print as you try to compare one account with another, but there is an easy way to spot the cynical savings companies. All you have to do is to remember three little words: annual equivalent rate.

The AER is shown alongside the gross (before tax) rate of interest. It shows the rate of return over 12 months assuming interest is compounded. If the AER figure is less than the gross, be warned – the account provider is hoping you'll bank your savings then forget to keep an eye on them.

Take, for example, Northern Rock's Tracker Online, currently occupying the top slot on the monthly interest account table compiled by financial data provider Moneyfacts. At 5.06%, its gross rate at is 0.7% higher than the AER.

That figure is the bonus that will be paid for no more than six months, after which the account will tumble down the rankings. In fact the only guarantee Northern Rock offers savers is that the account be no lower than 0.50% below the bank base rate until further notice.

At number six on the best-buy table is Chelsea Building Society's Triple Guarantee account. Its interest rate is 5.27% but it is ranked lower than Northern Rock because a minimum £100 deposit is required and withdrawals before January 10 require 90 days' notice.

Chelsea's interest rate is guaranteed to remain 0.50% above the base rate until January 2006 then 0.25% above base rate until 2007.

Which of these accounts do you think should be ranked number one?

• Contact information:
Chelsea BS: 08457 446 622

Northern Rock: 0845 600 6767