Savings battle resumes

The banks want our money and they are fighting hard to get it. Alliance & Leicester (A&L) has become the second provider in less than a week to increase the rate on its main savings account.

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A&L’s eSaver is now paying 6.56%, making it the market-leading rate among easy access accounts. The move comes just days after ING Direct increased the rate on its Savings Account from 6.0% to 6.5% and only weeks after Kaupthing Edge put the rate on its Instant Access Savings Account up from 6.5% to 6.55%.

Kevin Mountford, head of savings at moneysupermarket.com, said: "Today’s move by A&L means it leapfrogs Kaupthing to top of the easy access best buy table. We’re seeing a battle between foreign and UK banks for savers’ money at the moment and A&L is showing no sign of reining in its desire to acquire new business."

The Bank of England’s Monetary Policy Committee begins its two-day monthly meeting to discuss interest rates today. And although Bank rate is expected to remain on hold at 5%, the savings market remains highly competitive. It is highly unusual for savings rates to be so much higher than Bank rate, but financial institutions are still desperate to attract money from retail savers to plug the gap caused by the ongoing shortage of funds on the wholesale markets.

However, if you are looking to take advantage of one of the great rates currently available there are catches you need to watch out for. A&L’s eSaver has the highest rate among easy access accounts at 6.56%, but this includes a bonus of 0.94 percentage points which runs until December 7 2009 - so the rate will then drop to 5.62%. Also, no interest is paid in months when a withdrawal is made (with the exception of the month of July). Therefore, if you take money out of this account over the course of the year, you will earn a much lower rate than 6.56%.

ING Direct’s account also includes an introductory bonus, although unlimited withdrawals are permitted. The rate of 6.5% includes a 12-month bonus, so the standard rate of interest is significantly less attractive at 4.75%.

There is not necessarily anything wrong with such catches – as long as you are aware of them. If you opt for a savings account that includes a bonus, make a note to move your money to another account once the bonus period ends.

However, there are other competitive accounts without any catches. The Kaupthing Edge account, which pays 6.55% on balances above £100, has no bonus or withdrawal restrictions. Birmingham Midshires’ e-Saver Account is also catch-free – the rate on that is 6.52%. And Bradford & Bingley has a catch-free account – its Internet Saver 3 – which is paying 6.51%.

There are even higher rates available if you have money you can afford to lock away. ICICI Bank’s HiSave Fixed Rate account is paying 7.20%. The rate is fixed for a year and the account is available to savers who deposit £1,000 or more. You cannot access your money during the fixed term however. Kaupthing Edge, Firstsave First Bank of Nigeria and Icesave also have highly competitive one year fixed rate bonds, paying 7.15%, 7.10% and 7.06% respectively.

Disclaimer: Please note that any rates or deals mentioned in this article were available at the time of writing.

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