Poor deal behind a bonus

By SYLVIA MORRIS, THIS IS MONEY AND DAILY MAIL SAVINGS EXPERT
Updated: 00:00 EST, 19 January 2006

WATCH out for bonuses when you choose a savings account. They may seem to offer a tasty top-up of extra interest, but they are often being used to disguise a poor savings rate.

Banks and building societies are currently adding up to 1% interest in bonuses to attract savers into otherwise lacklustre accounts. But these bonuses last for only a few months, after which the account closes to new savers and the bonus disappears.

A new account is then launched, often with the same name but with a different issue number. The new higher rate is then made available to new savers but those already in the account earn a lower rate.

Because the name is the same it is easy for existing savers to think they are earning the higher rate. However, to get the higher rate, you must close your account and get one with the latest issue number.

The Banking Code, the self-governing rules laid down by the industry as to how it should behave, says that your bank or building society should tell you if your rate has fallen significantly compared with Bank of England base rate - currently 4.5%. 'Fallen significantly' means a cut of 0.5 percentage points or more over 12 months.

But bonuses paid for a fixed period are outside this rule so you can lose the bonus and the bank or building society does not have to warn you.

Savers in the AA's first issue of its Internet Account, launched last January, will see their rate drop from this week. They will earn 3.45% after 20% savings tax (4.31% before tax) once the 0.48% (0.6% bonus) goes, but savers in the second issue of the same account will earn 3.9% (4.87%), including a bonus.

The AA's 3.45% is a poor rate. Halifax WebSaver pays 3.72% (4.65%), Yorkshire Building Society Internet Saver 3.76% (4.7%) and Bradford & Bingley eSavings 3.88% (4.85%).

The AA's Telephone Savings Account current fourth issue pays 3.89%(4.86%), but savers in its first issue earn only 3.41% (4.26%) and those in its second issue are joining them as their bonus period comes to an end.

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Birmingham Midshires Internet Easy Access account in its fifth issue boasts a rate of 3.84% (4.8%), but its first and second issues pay only 3.44% (4.3%). And the eighth issue of Birmingham Midshires' Telephone Plus Account pays 3.8% (4.75%) before tax, but savers in its first to fourth issues now earn just 3% (3.75%).

Savers opening an Alliance & Leicester Online Saver, Issue 2 from January 9 this year earn a 0.72% (0.9%%) bonus until March 31 2007 on top of the basic 3.4% (4.25%). But savers who opened the same account a day earlier qualify for a bonus only until June 30 this year.

From June 30 their rate will drop to 3.4% (4.25%) even though the headline rate for new savers remains at 4.12% (5.15%). And those in the bank's Online Saver - the original internet account, closed to new savers last June - earn 3.6% (4.5%) on balances up to £25,000.

BOB WRIGHT, pictured with his wife Betty, had his wits about him when he saw adverts for AA Telephone Savings Account. The rate was higher than he was earning on the account, even though he had only recently opened it.

Bob, 73, from Birmingham says: 'I was just congratulating myself on switching from a poorer paying account to the AA's Telephone Savings Account at 4.76% before tax when I saw an advert showing a slightly higher 4.86%. I phoned to ask if they had raised the rate. But I was told it was another issue of the same account. If I wanted the higher rate, then I had to switch across, which I did.

He adds: 'I know I have to keep an eye on competitors to see if I should switch for a better rate but I do not expect to have to keep track of new similar accounts from the same company.'