Choosing a savings account paying 5 per cent over one offering 4 per cent might seem an easy decision.
But on a £10,000 pot, the higher headline rate could actually leave you worse off after a year.
The reason is a temporary bonus, that disappears after six months. Once it expires, the rate can fall far enough to wipe out the advantage you enjoyed at the start.
Calculations from Moneyfactscompare.co.uk show how this affects savers with £2,000, £5,000 and £10,000, and how switching when the bonus ends can turn the result around.
The question is - will you remember to do it?
How five becomes less than four
Among the best easy access savings rates, there’s always a lot of change and competition for the top headline rate - but it’s important to check all the terms suit your needs.
As one example, Starling’s Easy Saver currently offers eligible new customers five per cent AER for the first six months. That includes a temporary bonus. When it ends, the rate falls to 2.5 per cent, assuming the bank has not changed its standard rate by that point.
AER stands for annual equivalent rate and includes interest earned on interest. The important point here is that the advertised five per cent rate lasts only half a year.
Moneyfacts calculated how much interest each option would earn over a year, as shown in the table below, assuming you don’t add or withdraw any further money and rates don’t change across the year.
Starting balance | 5% for six months, then 2.5% | 4% for all 12 months | 5% for six months, then switch to 4% |
|---|---|---|---|
£2,000 | £74.85 | £80.00 | £89.98 |
£5,000 | £187.12 | £200.00 | £224.94 |
£10,000 | £374.25 | £400.00 | £449.88 |
Leave £10,000 untouched and the five per cent offer produces £374.25, against £400 from an account paying four per cent throughout - and over £75 fewer than if you made a mid-year switch.
Anna Bowes, savings expert at The Private Office, says: “I'm a fan of bonuses for people prepared to spend time looking at their savings, but a very short-term bonus is one people are more likely to forget about. Six months goes very quickly.”
Will you actually move your money?
The FCA’s Cash Savings Market Review found that only 23 per cent of savers surveyed in mid-2023 had switched savings accounts in the previous six months to get a better rate.
Bowes says savers unlikely to switch should consider an account without a bonus, or one lasting longer. “You have to be on the ball these days,” she says. “It's not as simple as just opening a savings account. People become overwhelmed by all the choices and end up doing nothing.”
A longer bonus can help. Zopa’s Limited Access pot currently offers eligible new savings customers 4.56 per cent AER, including a 12-month bonus. At an unchanged rate, £10,000 would earn £456. For smaller savings amounts, Cahoot’s Sunny Day Saver pays 5 per cent on balances up to £3,000; max that out and you’ll earn £150 interest for the year.
You also need to check other aspects of each account suit your needs; for example, Zopa’s rate is variable and making more than three withdrawals in 12 months reduces the rate. Cahoot’s doesn’t pay any interest at all on the part of your balance above that £3,000 limit.
When is switching worth the effort?
Using our earlier table as an example, if you were to move your balance from a 5 per cent to a 4 per cent account after six months, then someone starting with £10,000 would earn £449.88 over the year.
That’s £75.63 more than staying put, and £49.88 more than choosing 4 per cent from the outset.
On £2,000, the corresponding gains are £15.13 and £9.98. The extra interest earned helps determine whether another account application feels worthwhile.
Bowes suggests looking at the potential gain in pounds. Moving £10,000 from an account paying one per cent to one paying 4.56 per cent would earn £356 more over a full year, assuming unchanged rates.
For someone earning very little on their savings, making that first move could be worth considerably more than chasing small differences between competitive accounts.
“The key things are to check whether you'll earn the interest you expect and whether you'll have the access you need,” she says.
Read the conditions, set a reminder
Check the bonus expiry date, underlying rate, deposit limits and withdrawal rules before opening an account.
Rachel Springall, finance expert at Moneyfactscompare.co.uk, says: “The top rate on the market is not always the best choice if the account doesn’t suit a saver’s needs, for example if it restricts withdrawals.”
Even accounts without bonuses need reviewing if their rates are variable. Set a calendar reminder when you open the account.
Springall says: “Taking a few moments to check every detail and making a diary note of when a bonus expires could really make a difference.”
When investing, your capital is at risk and you may get back less than invested. Past performance doesn’t guarantee future results.
Read MoreLittle-known HMRC ‘loophole’ to earn £18,570 a year without paying tax
What rising bond yields really mean for your savings, mortgage and pension
The four cash ISAs battling for your cash
Gen Z warned of fake job offer messages amid employment crisis
Mapped: Average London rent hits nearly 3k as asking prices soar across UK
Rare gold coin worth £2,500 hidden inside Royal Mint advent calendar
