Friday, April 10, 2009

Internet Savings Accounts

The internet has become part of our lives and online shopping for goods and services is commonplace. Apart from the sheer convenience of the internet, logic tells us that if our chosen supplier has no expensive across-the-counter outlet to run, then the supplier’s operating costs are less, and we, the consumer, should benefit from better goods or services and a keener price.

The same logic should apply to the many types of savings account available only via the internet. With no expensive premises to maintain, we’d expect internet savings accounts to offer a better than usual rate of return on our investment. At first sight, this appears to be perfectly true and such savings account to be just the ticket. At the end of 2007, for example, a number of big-name companies launched exclusively online savings accounts offering more than 6% interest and as much as 6.4% interest before tax (5.12% net). This made them surely a rate to go for. Or did it?

The twist in the tail

There was a twist in the tail with each of the accounts. First, they artificially boost the claimed interest rate because this includes a bonus rate – of 0.4% or even 0.6% - which is paid during the first year only. Thereafter, the rate of interest is without the bonus. Furthermore, most of these seemingly high-performing savings accounts impose very punitive conditions if you make any withdrawals from the account. For example, the leading companies make no interest payments on any savings balance in your account during any month when you make a withdrawal. Even if you allowed just three months when you might need to withdraw funds, therefore, the effect on the overall annual rate of return on your savings falls dramatically – putting quite a different perspective on the vaunted performance of internet savings accounts.

A third “trick” used by many banks and building societies is to offer what is indeed a good rate of interest – but only for a while. These accounts appear with great fanfare, are open for a while and then closed to new investors. Gradually the rate of interest falls and becomes much less attractive and competitive. For this reason, it’s a very good reason periodically to check the interest rate actually being paid on your savings account. Do this, as you also check for new accounts appearing on the market. Generally speaking, you’ll find that the rates offered to new savers are higher than those that continue to be paid on closed accounts.


Rather than looking just at the claimed maximum rate of interest, therefore, anyone interested in an internet savings account could do better to strip away the inflated claims that depend on a short-term bonus and shy away from those that penalise you for withdrawing money from your account. With these gimmicks cleared away, you can begin to see the wood for the trees and discover that there are other “clean” savings accounts which do not rely on such tricks, yet which also manage to guarantee a rate of interest a given percentage above the Bank of England base rate for a given period of time.


If you’re about to open an attractive-looking internet-only savings account, therefore, take a moment to check whether:

* The rate of interest offered has been “inflated” by the addition of a temporary bonus
* You will be sacrificing significant returns on your savings every time you withdraw money from your account
* Although it’s very difficult to predict when it might happen to you, be aware that some companies have a poorer record than others when it comes to offering new types of account for a short-term, only to close them soon after.

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