Comparing Savings Accounts - Looking Beyond Interest Rates
When you're looking for a new savings account, it's tempting to head over to a savings comparison table and simply pick the one offering the highest rate of interest. Unfortunately, this being finance, things are a little more complicated than that, and there are other factors you need to take into consideration alongside the basic rate.
Regular Saver or Depost?
Firstly, is the account a regular saver or a deposit account? Some banks offer extremely attractive rates on accounts that turn out to be ones where you deposit a certain amount each month, with no option to pay in a lump sum. These accounts by their nature limit the amount of interest you can earn, as they generally have an upper limit to the amount you can choose to deposit each month.
While regular savers might be good for people with a regular surplus of funds each month, they aren't suitable for those who already have a lump sum to invest, where a normal deposit account is the better choice.
Bonus Rates
The second point to look out for is whether or not your account features a bonus rate. Such bonuses are generally limited to the first six or twelve months of the account being open, after which the rate will drop to a less attractive level. Bonus rates can lead to an account topping the best buy tables when it may not be competitive in the medium to long term. By all means, take advantage of the high rate while it's on offer, but be aware that you may have to start the process of looking for a new account sooner rather than later if you want to continue making the most of your savings.
Interest Rate Guarantees
On a related point, some accounts offer a rate guarantee whereby (for instance) the interest rate is guaranteed to match or exceed the Bank of England base rate for a set period. While these accounts may not offer the highest available rates, they're guaranteed to offer a decent rate well into the future and so are useful for those who don't wish to spend their time monitoring the best buy tables and moving money from one account to another.
Monthly or Annual Interest Payment
Some accounts pay the interest that accrues on a monthly basis, while some pay annually. On the face of it, monthly interest would be preferable as it opens up the possibility of earning compound interest. In reality, this isn't a major point to consider unless you want to take a monthly income out of the account. Interest rates on offer are quoted in terms of AER or Annual Earnings Rate, which are calculated to take compounding into account. Two different accounts with the same AER, one paying interest monthly and one annually, will both earn the same in total interest over the course of a year.
Access Restrictions
Finally, you need to bear access in mind. While many accounts allow you to withdraw money as and when you see fit, some impose restrictions - and in general, the better the interest rate, the more stringent the restrictions. Some will cancel any interest earned during a month if a withdrawal is made during that month, while others require you to give a lengthy notice period before making a withdrawal. Both types of account have their place, so be sure to balance the rewards of higher interest against the chances of you wanting to make a withdrawal before deciding on opening a particular account.
