FOOL'S EYE VIEW
Britain's Best Savings Accounts

By Stuart Watson (TMFTiger)
June 10, 2004

I have to confess. I am somewhat of a rate tart. Over the last few years, I've moved my savings around several times in search of a higher interest rate. My cash has passed through Cheltenham & Gloucester, Egg (LSE: EGG) and Intelligent Finance. Most of it is now with ING.

I'm not alone in being a tart, though. Millions of savers are voting with their feet and moving their cash out of low-paying accounts. Egg kicked off this particular savings battle back in October 1998. Back then, their account offered 8% - wouldn't that be nice now!

In the following years, as interest rates fell, the market slowly became less competitive. Then ING stirred things up again when they launched their account in May of last year. In its first twelve months, ING gained an impressive 500,000 customers.

Now with rates on their way back up again, the whiff of competition is in the air once more. That's great news for us customers. Less than four weeks ago, Alliance & Leicester (LSE: AL.) launched their new 'Online Saver' account. Paying 4.85% AER, it sits proudly on top of the Best Buy tables at the moment.

Before looking at the best the market currently has to offer, a few thoughts on what makes a good savings account. The following is predominantly what I like to see, but I think I'm reasonably typical of the average rate tart.

A high rate that stays high

First of all, a high interest rate. Almost goes without saying. However, what we want is a consistently high rate. This means those paying short-term bonus rates for six months or a year don't make the grade. Tiered rates are also a turn-off. Rate tart I may be, but opening a new account and moving my cash around is still a pain, and I want to do it as little as possible. Nevertheless, I've found that every couple of years, the difference between the account I had and the best rate available meant I was forced to switch. 

Flexibility

I want to be able to move cash in and out of my account as and when I need it. So notice accounts or those offering fixed rates over a period of years are no good to me. I also want to be able to access the account online, so I can move my money whenever I want.

Having laid the ground rules, onto our top five:

1. Alliance & Leicester Online Saver -- 4.85% AER

Top of the tree is this new account from former building society Alliance & Leicester. This is a simple no-catches account that has a minimum balance of £1. The one downside is that you can only put a maximum of £25,000 into it and it is one account per person.

2. ING Direct -- 4.7% AER

The silver medal goes to ING. It's been top (or near the top) of the Best Buy tables since it was launched and is another simple account with a minimum balance of just £1. No maximum balance problem here, though. You can put up to £2m into one of their accounts and you can hold up to ten accounts at a time. Not many rate tarts are going to find this sort of ceiling a problem!

ING are advertising with us at the moment. See our savings centre for details of how to open an account.

3. Manchester BS Premier Access -- 4.65% AER

It's a competitive rate but it does have a couple of disadvantages. Firstly, there is a minimum balance of £2,500 and a maximum of £50,000. You can also only make four withdrawls a year. Boo! Ideally, as I favour flexibility, I don't want any limits on the number of times I can withdraw my cash each year.

4.= Cahoot Savings Account -- 4.6% AER

Cahoot, the Internet arm of Abbey National (LSE: ANL), has been a fairly regular feature in the Best Buy tables. This account passes the no-nonsense test although it does offer a lower rate (3.5% AER) on balances over £250,000. You also have to be over 21 years of age to open an account (our top three all have a minimum age of 18).

4.= Yorkshire BS E-Saver -- 4.6% AER

Completing our quintet is this account for the Yorkshire Building Society. It's one for the youngsters, having the lowest age requirement of the five at 16 years. The minimum balance is £250 and the maximum is £500,000.

Some practical pointers on rate tarting

So there we have it. I'll finish with a few more points on rate tarting.

Firstly, if you're the cautious type you might want to consider spreading your money over one of more of these accounts. The Financial Services Compensation Scheme pays out a maximum of £31,700 (that's 100% of the first £2,000 on deposit and 90% of the next £33,000) should your chosen company go belly up. Given the size of the companies above, the chances of you needing the scheme are miniscule in my opinion. But it's something you may want to consider.

Another option you might consider is a current account or offset mortgage. If you've got a sizable savings but an even more sizable mortgage, you can offset the two. Instead of earning interest on your savings, you save it on your mortgage. The advantage being, not only are mortgages rates typically higher than savings rates, but you don't have to pay any tax on the interest you save either. Against this, however, you have to balance out the fact that mortgage rates on these accounts are often higher than the best mortgage deals available.

Just before this article was published, the Bank of England raised the base rate from 4.25% to 4.5%. Naturally, none of the above accounts have had a chance to increase their rates yet, and some of them may not pass on the full amount of the increase. So it's possible that the order of the top five could change, or that we'll see a new entrant.

It normally takes a couple of weeks for changes to be announced. For example, following the last rate rise on May 6, it took until May 13 for ING to show their hand, with their new higher rate not coming into effect until June 1.