Savings Guide: Savings and Bonus Rates

Jul 6, 2012   //   by Keith McDonald   //   Savings Guide  //  Comments Off on Savings Guide: Savings and Bonus Rates

Welcome to this Which4U savings guide video. Today, we’re looking at how bonus rates affect savings accounts and ISAs.

It’s probably not such a secret any more, but many savings accounts and instant-access cash ISAs include attractive bonus rates to produce the headline rate you see on your screens, on advertising boards, or in pamphlets. However, these bonus rates tend to disappear after 12 months, and your returns could fall overnight by as much as 92%.

Let’s check out some of them here. We see one example of a 3%+ account, supported by a bonus that leaves a paltry rate of just 0.5%. Inflation is much higher than this, and it’s just not a good enough return.

Why does this happen at all? Well, it’s partly our own fault. Banks have realised they can benefit from our apathy to the rates we receive. Research last year showed that over half of British savers had no idea about the rates they were receiving on their ISAs. Some savers reported that they had never changed to achieve a better rate.

So, what’s the optimum way to deal with this issue and make the most of your savings?

Well, the best way of making the most of savings is to ensure that you keep a headline rate. So, check carefully about the details of the savings account or ISA that you are investigating. Make a careful note of the expiry of the bonus rate, and ensure that you move your savings to a new account at this time.

It all seems simple. Really, it is. But there’s a problem. This assumes that we’re all perfectly efficient. But research across the board shows that, by and large, the majority of savers just don’t operate with this efficiency or opportunism.

Traditional savings patterns aren’t normally governed around switching on a yearly basis, and that’s not a situation that’s likely to change overnight. So – while it may be controversial – at Which4U, we would suggest that it’s just as important to judge the value of a savings account or ISA beyond 12 months.

While decent ‘standard’ rates that follow the expiry of bonuses rates are rarely brilliant, some can still be far better than others.

You’ll see that in our savings guides and commentary, I’ve used charts and graphs to demonstrate my reasoning. Here’s an example created in the peak of ISA season.

If we place a lump sum of £5,340 in these ISAs, and monitor what would happen if we left it there for two years, the results are very interesting. Two of the best three performing accounts from the first year were the worst performing in the second year. This investment in the Cheshire Building Society would still have reaped almost £120 in interest in the second year. That’s £92 more than the AA or Santander.

So, why are standard rates important? If we look at this graph: this 12 month point is where the bonuses fall away and the returns become very little. After as little as two weeks, other accounts could start outperforming that which sparkled initially and then disintegrated to nothing.

And normal savings accounts are exactly the same. Let’s have a look at a recent graph here.

As we can see, some tail off, while accounts with stronger standard rates perform more strongly for longer.

Some accounts, we see here, Sainsbury’s and Virgin Money – have no bonus rate at all, so there is no loss.

As this clearly shows, for a small sacrifice in the headline rate, it’s not long before you’re laughing, and this is without you having to worry so much about dates, deadlines, expiries, transfers and all else.

 

In summary: it’s regrettable, but it takes much more effort these days to make the very best of your savings, especially if you want to retain easy access to your cash.

Be that as it may, if you know you’re not going to want to chop and change, consider the ‘standard rate’, using our guides for help, to see how you can avoid the rates that crash and burn and still offer you something substantial in the longer-term.

So, hopefully now you feel in a better position to make more from your savings. Why not bookmark our savings guides on Which4U for updates on the best products, for one year and beyond? Check out our YouTube channel for more video guides, and follow us on Facebook and Twitter as well. If you have any questions, comments, or feedback, please do drop us a line. We’d be pleased to hear from you.

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*Update: The Bank of Cyprus established a UK subsidiary in June 2012. Hereafter, UK-based deposits are now protected by the FSCS

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