Many of the best rates pay out for just a year – so make sure you switch in time.
3:14PM GMT 25 Nov 2011
Savers are being warned that best-buy savings rates can plummet by up to 96pc in the year after they open an account. The reason is bonus rates.
Bonus rates are one of the wheezes that banks and building societies use to get you to deposit your money in one of their accounts.
With Bank Rate at just 0.5pc and with little prospect of a rise soon, savers scratching around for a decent rate of return are easily tempted by interest rates of 3pc or more. But banks and building societies prey on savers' apathy, knowing full well that the majority won't switch again when any bonus rate disappears.
Such inertia will cost savers dear.
Take Bank of Scotland's Internet Saver account. It is currently paying 2.8pc, but this rate includes a whopping 2.7pc bonus. So at the end of 12 months the rate drops to just 0.1pc. A saver with £50,000 in this account would see their annual interest payment fall from £1,400 to a miserly £50.
Susan Hannums, a director of Savingschampion.co.uk, said: "Bank of Scotland is clearly banking on people's inertia, hoping that these savers will remain in the account receiving virtually nothing in interest after the 12-month bonus period. Savers simply don't need to stand for this, as not only can they get a better rate elsewhere, but they won't be left with such an appalling rate once the bonus period ends."
Research from Savingschampion.co.uk shows that two in three savings accounts today include a bonus in their headline rates. And these "teaser" rates are getting bigger: in January 2008 the average bonus was just 0.65pc, with the biggest at 1.24pc; today the market average stands at 1.66pc, while the biggest is the 2.7pc bonus offered by Bank of Scotland.
All the big high street players hook customers in with these bonus deals. For example, of the six variable-rate accounts offered by Halifax, five have a bonus or condition attached, while six out of nine such accounts from Santander do likewise.
But banks rarely make loyalty pay. Such practices show that they are more interested in attracting new money than paying a decent rate to customers who have banked with them for years.
Many of those who snapped up one of the best buys a year ago may be surprised to learn how little interest they are getting on their savings.
For instance, savers who opened the AA's Internet Extra (Issue 3) account in September last year would no doubt have been attracted by the competitive rate of 2.8pc. But one year on, these savers are getting just 0.5pc. Similarly, those who opened the BM Savings Telephone Extra account (Issue 3) will find the interest rate dropping from 2.6pc to just 0.5pc.
Ms Hannums said these examples should serve as a warning to income-starved savers currently scouring the best buy tables. By all means take advantage of these short-term deals, but make sure you switch your money again at the end of the term. She added: "Savers cannot afford to rest on their laurels. Once the bonus falls away, interest simply disappears."
Unfortunately, most savers do rest on their laurels. And not surprisingly banks and building societies aren't too forward when it comes to pointing out what dismal rates of interest customers are now being paid. Most banks still do not include interest rates on annual statements and neither are they displayed when the customer logs in to online banking.
Even searching online for a list of up-to-date rates can be tricky, particularly once the account is no longer on sale. David Black of statisticians Defaqto said providers should make it clear that an account has an introductory bonus when it is advertised and notify the customer when the bonus is about to end. Yet many savers remain uninformed.
"For the saver, this means they need to review their accounts on a regular basis if they want to secure the best returns," he said. "If you've had a variable-rate account for over a year it's a near certainty that you could get a better rate from a similar account elsewhere."
Savers have also been warned to check the small print and watch out for the early withdrawal trap. For example, Manchester Building Society pays 3.16pc on its Premier Notice account. But this allows just four withdrawals a year, and you must give 35 days' notice each time. This rate also includes a 1.5pc bonus.
Research from Moneysupermarket.com found that despite the disparity in interest rates between new accounts and older ones, only one in three people checks the interest rate on their savings account each month, while more than 10pc could not remember the last time they checked their rate. Almost 9pc admitted to never having checked.
But while it may be difficult to check what rate is paid on old accounts, finding the most competitive new deals could not be easier. The most straightforward way to compare savings products is through a comparison site such as Savingschampion.co.uk, Moneyfacts.co.uk or Moneynet.co.uk.
Current best buys include Coventry Building Society, which pays 3.15pc for easy-access savings, and Santander's eSaver Issue 4, which pays 3.1pc. These rates include bonuses of 1.15pc and 2.6pc respectively, paid for a year – so put that date in your diary.
For those who do not mind locking up their savings, Yorkshire Bank's two-year fixed-rate bond pays 4.01pc on minimum deposits of £2,000, while Bank of Ireland's Web Bond Issue 4 pays 3.9pc on deposits of more than £500. For longer-term savers, Kent Reliance Building Society's 5-year Fixed-Rate Bond Issue 5 pays 4.7pc on £1,000 or more.
Kevin Mountford of Moneysupermarket.com said: "Bonuses are a great way for consumers to maximise the return on their savings in this low-rate environment. However, the benefits can soon be wiped out if customers forget to switch once the promotional period has expired."
The message is clear: when it comes to our banks and building societies, you get scant reward for being loyal. Take the bonus by all means but get ready to run to another account when its time is up.