Demise of the bonus-paying savings account is a disaster


The money pages are once again full of bad news for savers. This time, the warnings are about bonus-paying savings accounts which are coming to an end.

These accounts pay a bumper rate to start with, propped up by a bonus rate for a set period of time. So for example your money might be stored away in an account paying 3% (lucky you), though 2% is in the form of a 12-month bonus.

Many bonus-paying easy access accounts are nearing the end of their bonus periods, hence the warnings for savers to start moving now to avoid seeing the interest they earn on their cash plummet.

'Lured' by exciting rates
There have always been plenty of opponents to savings accounts paying bonus rates. The argument goes that you're benefitting from an artificially high rate for a little while, and will need to shop around again in a year or so to find a new competitive rate.

Opponents of bonus-paying accounts argue that's too much effort. We want to find a home for our cash where we can just leave it, safe in the knowledge that it's racking up interest without needing to worry about it. They also suggest that savers are lured in by the juicy initial rate, but forget to move their cash once the bonus ends, leaving them saddled with a rubbish rate.

I'm not sure I buy that argument. It's not like these accounts don't clearly state that there is a bonus for a limited period. All it takes is a reminder on your calendar and you can easily move your cash before the bonus ends.

For the sake of a better rate, I don't think it's too much trouble to move your savings every year or so.

The trouble is, I can't even do that anymore.

A worthless bonus
The whole appeal of a bonus-paying savings rate should be that you get a better rate up-front, in the knowledge that you'll need to move it in a year's time or else see that interest rate fall.

However, bonus-paying savings accounts are now paying worse interest rates than simple easy access accounts that won't slash your return in a year's time.

Let's take an example. The best rate normal savers can get at the moment from a bonus-paying easy access account is 1.50% from the Post Office Online Saver, which includes a 0.60% bonus for a year.

Yet you can get a rate of 1.75% from Britannia with its Select Access Saver, without needing to worry about moving your money in a year to avoid a rate crash. Indeed there are easy access accounts from Nationwide, Yorkshire Building Society, Coventry Building Society, West Brom Building Society and Sainsbury's Bank, all of which pay a higher rate than the Post Office Online Saver, without the burden of a bonus.

At this point, surely the 'bonus' on offer is completely worthless?

Funding for Lending
It's a fair bet that if you've read an article about savings rates of late, the words Funding for Lending will have appeared. And with good reason, as the scheme has obliterated the savings market.

Funding for Lending, which was launched last summer, allows banks and building societies to borrow incredibly cheaply from the Bank of England, so long as that money is then lent out. As a result, they don't need to use their savings accounts to build up funds for their lending activities.

In an attempt to get the economy growing by getting banks lending, the Government has crippled savers. Last June, the top rate of interest on an easy access account came from the Santander eSaver, which paid 3.2% AER. Surprise, surprise, it included a 2.7% bonus. Indeed all of the top five rates included a bonus rate of some description.

A little over a year later, now that Funding for Lending is working its magic, you'll be lucky to find an account paying half what Santander offered. And all the while, the economy continues to limp along, while banks and building societies outdo each other on a weekly basis offering new 'lowest ever mortgage rates' to the low-risk borrowers who already had plenty of choice before Funding for Lending even began.

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It's been a farce.
We NEED better bonus-paying accounts
Whether you think moving your savings around on an annual basis is a chore or not, it's beyond dispute that the current malaise in the bonus-paying savings account market is a problem.

Savers need to at least have the choice of whether to sacrifice an easy life for the sake of an improved rate on their savings. At the moment, there is no choice. Mediocrity rules supreme.

Last week I wrote a blog asking the Lovemoney readers to share their plans for their savings pots . I said that I'm doing a little of everything with my own savings. But one thing I won't be doing for the foreseeable future is putting a penny into a bonus-paying easy access account.

And that's a damn shame.

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