Once, introductory savings bonuses were rightly called a scourge. Yet with UK interest rates at 0.5%, these days they effectively provide a cast-iron rate guarantee. So while the sentiment of the Sunday Times’ call for banks to stop offering them is fine, I worry the timing is dire.
The paper’s money section front page was emblazoned with the headline ‘Banks: give us a fair deal on savings’, (this link goes to a paid firewall) with a five-point plan for savings providers. Most of the points are the type we’ve supported for years, like "don’t limit withdrawals" and "make accounts simpler".
But the first point concerns me. It calls on banks and building societies to…
Offer ‘clean’ easy-access savings rates that do not include an introductory bonus that will be withdrawn after a set time."
Why this could be dangerous right now
It assumes clean accounts pay consistent rates. Yet all easy-access savings are ‘variable rate’ which means banks can, and do change (ie, drop) them. And not just when the Bank of England moves UK rates – but for their own competitive reasons too.
There are many clean rates out there which once started with market-leading deals, but are now dismal at 1% or less.
Contrast that with an account with a fixed introductory bonus as part of it – effectively a temporary interest hike to attract new customers. With interest rates at 0.5% and unlikely to drop further, as the bonus is now a high proportion of the total interest, it effectively works as a minimum rate guarantee during the introductory period, promising at least some interest.
Take the table below contrasting the current top clean and bonus accounts (from £1). For product details, see the Top Savings guide.
2.6% bonus for 12 mths
Therefore while the bonus account will likely be, at worst (1), 2.6% for the next year – only a fraction below the clean account’s standard rate – and the clean account has no guarantee, it could drop to 0.1% any day. In practice that’s unlikely, but a gradual degradation of the rate (assuming no interest rate changes) is certainly common with clean savings.
So for me, the bonus account has the following advantages:
- A higher immediate interest rate.
- A minimum guaranteed rate for a year.
- No need to monitor it closely for a year.
- Knowledge to diarise and ditch in a year.
You may find my last point a slightly strange positive. Yet with the clean account, in a way it’s easy to let it languish and the rate slowly drip off. If that happens when is your action point? When the rate drops to 2.5%? To 2%? Or to 1.75%? Whereas with the bonus account, the clearly set-out period that it ends, in a year, at least allows you to make a diary note to ditch and switch – effectively a savings renewal date.
Of course that’s no help to those who find the whole process aggravating and want consistency. Yet you don’t get that with a clean account either – it still needs monitoring, and may need ditching. If you want that right now with a decent performance, you need to lock cash away in a fixed or guaranteed savings deal instead.
In a low interest rate environment, we must accept that keeping your savings rates as high as possible needs active saving. I’d love to see a savings environment with more tracker-type rates, which give decent consistent returns. Sadly, the only ones available right now give awful rates.
So in these days of dismal interest, to call for something which risks decreasing any form of rate surety is playing a little too close to the fire for me.
What do you think? – Please let me know below…
(1) Technically some bonuses are ‘variable rate bonuses’, which means the bank can vary the rate (up or down). In practice I’ve not heard of banks ever cutting it (if anyone has, let me know below), but only raising it when others come out with a better rate. If they did drop it, it could certainly give cause for a ‘treating customers fairly’ challenge at the ombudsman – even though this is why I say the rate on the bonus account is “likely" to be the worst you’ll get.