ING Direct has increased the rate on its savings account from 3.00% to
3.20% - what's more this is guaranteed for a year. And Sainsbury's Finance has launched a new account, the Easy Saver, which is paying a slightly lower rate of
2.80%. Even so, with the Bank of England base rate at 0.50%, this is still pretty impressive.
Why all the activity?
With the base rate having remained unchanged at 0.50% since March, you wouldn't normally expect such a high level of activity in the savings market and you certainly wouldn't expect easy access savings rates to be paying more than 2.00% higher than the country's official interest rate. But the current environment is indicative of the unprecedented times we find ourselves in.
Banks and building societies still remain desperate for our cash because, despite the Government having pumped billions of pounds into the financial system to alleviate the problems caused by the credit crunch, institutions are still facing a funding shortage. They are therefore looking to retail savers to help plug that gap.
It's also important to note that not all savings accounts are offering such attractive returns: the average no notice account is paying just 0.15%, according to the Bank of England.
Savers therefore need to be proactive: we need to move our money so that we are benefiting from the best rates available. But we also need to remain vigilant.
Most of the leading deals include introductory bonuses which tend to run for 12 months. Once that period is up, the rate plummets. What's more, the competitiveness of the account could begin to wane even sooner as many bonuses are variable meaning the provider can reduce it at any time.
Kevin Mountford, moneysupermarket.com's head of banking, said: "Savings rates are over-inflated at the moment because banks and building societies still need our money. Once that need subsides, we could see rates subside and with many accounts including variable rate bonuses this may mean your return drops when you're not expecting it to. One way around this is to opt for a rate that is guaranteed, or that includes a fixed bonus."
So what's available?
Coventry Building Society's 1st Class Postal Account is still available paying 3.30%. However, for an easy access account there are some fairly onerous conditions attached: withdrawals are allowed, but you can only make four per year, and the minimum amount you can take out at any one time is £1,000. Also, the rate includes a 12-month bonus of 1.30% and this is variable.
If you'd prefer a more flexible option, Egg's Savings Account is paying 3.25%. Although at 2.00% the bonus is high, it is fixed for a year and unlimited penalty free withdrawals are allowed. Theoretically there is a chance that the rate could alter during that time if Egg decides to change its standard savings rate which is currently 1.25% - providers usually only alter these rates if there is a change in the Bank of England base rate.
Alternatively, ING Direct's Savings Account is not far behind at 3.20% and this rate is guaranteed for 12 months - it then drops to ING's standard rate which is just 0.50%.
Other leading deals which allow unlimited withdrawals include Alliance & Leicester's Online Saver Issue 5 and Birmingham Midshires' Telephone Extra Account which both have a rate of 3.15%, or Citibank's Flexible Saver Issue 5 at 3.10%. Do note, however, that the bonuses on all these accounts are variable. This doesn't mean the rate will definitely drop during the bonus period - in fact A&L said it has never reduced its bonuses during the term - but it could do.
Be prepared to move again
The other key thing is to remember to move your money again once the bonus ends. Banks and building societies can't afford to pay all savers the amount of interest they're offering on their headline deals, which is why they use bonuses. The extent to which savings rates are over-inflated at the moment can be seen in the size of the average bonus which has risen from 0.71% two years ago to 1.93% now.
If you put £3,000 into ING Direct's account, you'll earn £96.00 in gross interest over the first year but just £15 in year two (assuming the standard rate remains the same as it is now).
This is very much an era where it pays to be an active saver: open a new account now to take advantage of the great deals available then open another account in a year's time when the introductory offer ends.
Please note: Any rates or deals mentioned in this article were available at the time of writing. Products underlined can be applied for directly.
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