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Don’t fall into any of these saving traps

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Profile photo of Paul Davies Paul Davies Principal Money Researcher
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It isn’t easy getting the most out of your savings, with restrictions and penalties waiting to trip you at every turn. And as we fall into a double-dip recession, it’s even more important to avoid these saving traps.

Things are still pretty tough for those of us still able to save money at the moment. The base rate has been stagnant at 0.5% for more than three years, making it a challenge to get a decent return on your cash.

You’d have thought that, in this situation, providers would make sure their products are as straightforward and transparent as possible. However, we’ve found that this isn’t always the case.

The bonus culture

There’s no problem in companies offering an attractive 12-month bonus on instant access accounts, as long you remember to switch products when the bonus drops off. The Halifax Online Saver is offering a rate of 2.8%, but 2.7% of this (or 96% of the overall rate) is made up of a 12-month bonus. The underlying rate is actually just a paltry 0.1%.

Action: If you opt for a savings account with a bonus, make note of its expiry date and switch accounts when the time comes.

Instant access accounts, by their very nature, should allow you to put money in and take it out when you like. However, we found that some accounts, notably the Barclays e-savings Reward and Nationwide BS MySave Online Plus, limit the number of withdrawals you can make and charge interest or a fee if you exceed the limit.

Action: Check the terms and conditions of instant access accounts so you don’t end up sacrificing interest if you make a withdrawal.

Penalties and restrictions

If you opt for a fixed-term, fixed-rate bond for up to five years, you’ll need to be sure that you won’t need to withdraw any of the money. If you do, you’ll face stiff penalties and may lose some of your capital. Saffron Building Society’s one-year fixed-rate bond charges 180 days’ interest if you need early access.

Action: Consider splitting your cash between instant access and fixed-term accounts in case you need money in an emergency – that way you’ll avoid penalties.

There could also be an unwelcome surprise when you come to the end of your fixed term. Some accounts ‘tip’ you into a poor-paying instant access account, or ‘roll’ you into another fixed-rate deal if you don’t inform them otherwise. Ending up in an instant access account paying just 0.1% or 0.2% is fairly common, although your bank or building society will write to you to inform you of the fact.

Action: Keep a note of the maturity date of your fixed-rate accounts and start researching the best new home for your savings up to a month beforehand.

Flexibility or complexity?

Banks will argue that they’re reacting to consumer demand and that most of the features their accounts offer are designed with the average saver in mind. They’ll also argue that the very best rates will always come with restrictions.

Do you accept this or are your saving account’s terms and conditions just another way for providers to catch you out and claw back some of your hard-earned interest? And have you fallen into any of these saving traps?

Comments
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wavechange says:
26 April 2012

I’ve been caught out quite often, most recently by Halifax and Santander.

It is a good idea to make a not of expiry dates of preferential interest rates, but that will not help when new accounts appear and the old ones attract a paltry interest rate.

If there is any bank or building society that never does this, please share this information.

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William says:
26 April 2012

I signed up to an 8% regular saver account with First Direct, you can only pay in £300 a month, but if I miss one, then the interest rate drops to 0.1 or 0.2 %. When I set it up I made sure the account had enough to cover the entire year, only to get a phone call 2 days later saying I can’t use that account to make payments, doh. Strange how it let me do it in the first place though.

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richard says:
26 April 2012

I set the 8% regular saver account with First Direct, with a direct debit so I never forget – What I have done is to keep my Current Account ‘full’ at the beginning of the month – then transfer any surplus out into a savings account as it arrives. The problem for me is the requirement for instant access, .

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John Paterson says:
27 April 2012

I really don’t understand the Banks’ logic on the question of bonuses. OK, they “gain” financially from those who forget to switch at the end of the bonus term. But, surely, this is offset by the loss of customer loyalty by those who do switch and the loss of respect from most of us who remember a time when 99% of Banks were able to run a respectable business at a decent profit without the gimmicks of disappearing bonuses. It is a pity that the government does not see fit to ensure that banks write or email customers when bonuses drop off an account – at least for those banks where the government (ie the tax payer) is a majority or significant shareholder.

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RussellR says:
27 April 2012

I am sure that the Banks have done their sums on this type of account, so they must make sense to their financial requirements even if the logic is not explained.
As far as contacting customers when bonuses drop off – well, the customer is told the terms and conditions when the account is opened. If they have to repeat this information at a later date this will only add to costs and reduce the return to the customer further.
It is our money – if we are bothered about such things there are calendars/diaries/phones where an appropriate note can be made – it is not anyone elses job to do this.

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rod says:
28 April 2012

Santander have sent me notification of the end of bonus period for saving accts and ISAs during the last year. I thought this was something forced on them by the FSA, as it has never happened before. Are Santander the only bank doing this ?

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John Paterson says:
27 April 2012

I see where you are coming from Russell but an email would not cost much – it is free apart from the cost of paying someone to write the original text. At a very minimum, I would expect my (largely tax payer owned) bank to mention that my savings account bonus had disappeared when they next wrote to me on another subject. As it happens I do “diary” things like bonus termination dates – but my father wasn’t too hot on stuff like that when he was in his 80s – as I found out when I was sorting out his estate!

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Pangit says:
28 April 2012

Master Limited Partnerships: (MLP’s) give incomes of 10% or above with no work involved.

They are a bit like REIT’s but invest in things like oil pipe lines etc.

They return between 6% and 15% a year tax free based on the price of the shares.

The returns rise every year in general.

The shares are not volatile ad tend to go down when general interest rates rise and fall when general interest rates rise.

But you would invest in these shares for high rising tax free income not capital gains.

You only pay tax when you sell the shares – basicaly you buy them and never sell just pass them on to someone when you die.

These are USA product so you would need to look at the US tax and the UK tax (There is an agreement between the two countries.) But better to get advice from a tax consultant.

Typical examples of these shares are:

Kinder Morgan Energy Partners LP – NYSE Code KMP

Boardwalk Pipeline Partners, LP – NYSE Code BWP

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Anne says:
30 April 2012

I feel that it is totally unacceptable that banks are allowed to drop interest rates (or remove annual bonuses as it’s now called), without prior notice. I have recently had to inform both my father and an elderly friend, that the interest rates they thought they had on their ISAs were currently running at 0.1%. They thought the rates were still the same as when they opened the ISAs (one of them about 5 years ago) and didn’t realise they could move them to a different ISA – even within the same bank or BS. I think all banks and BSs should have to pay back pensioners for the interest they have missed out on.

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Paul Dix says:
23 June 2012

I just been the victim of what I consider to be a con trick by Halifax. I had a 3 year cash ISA with them which was to mature in June this year. I had a letter from them in May warning me of the maturity date and asking me to return a form to them saying what I would like to do.
They gave interest rates for 1,2,3,4,5 year terms for reinvesting, and I chose the 2 year term which was at 3.70%AER. When I heard from them that my matured amount had been put into a 2 year term ISA they gave the interest rate as 3.25%.
Upon ringing them I was told that interest rates had dropped – but I consider that I should have been told what the new rate was before they took my money and tied it up. If you are going to purchase anything else and the price suddenly shoots up you expect to be informed before you purchase!

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