When it comes to banks, loyalty does not pay. If you have not changed your current account or moved your cash savings to another bank in the last six months the chances are you are throwing money away. The five major High Street Banks normally pay you 0.1% on the balance in your normal current account. So if you have an average of £1000 in there during the year you will earn just £1 in interest – before tax! You can get better deals from some of these banks if you have at least £1000 a month going in and use the internet. But you can do better by moving to one of the online accounts. Cahoot is currently paying 4.17% on your balance. So if you have an average £1000 in there you would earn £41.70 a year in interest - £33.36 after basic rate tax. The interest is paid from the first £1 and there are no restrictions on putting money in or taking it out. You can earn slightly more if you do not have a chequebook and do all your banking on-line.
Moving your cash savings can be even more important. The best deals can pay you 5% or more. The worst – well name your figure. Twenty pay less than 0.5%! First direct is currently the best with 5.2% followed by cahoot with 5.1%. The Indian bank Icici is currently offering 5.4% but that may be cut later in 2005. And of course if base rates fall all these rates will be cut. Beware rates that seem higher than these. They may be an ‘introductory offer’ which will be withdrawn after six or twelve months. Most of the accounts in the ‘top ten’ are usually introductory offer accounts or have other restrictions on them. If you don’t want the hassle of moving your money once or twice a year stick with the accounts that have no offers, no restrictions on how much or how many times you can pay in or take out, and which pay the same rate of interest from the first pound to the last. In the long run they are the best value. Check the rate you are getting at least once a year. It is not worth moving for a 0.1% increase, you could lose that much as the banks hang on to your money in the changeover. But for a quarter point or more then it is worthwhile.
What you can do now
Moving your current account should be easy. The banks all subscribe to the
Banking Code which means they have to make moving your account as easy as
possible. Once you open the new account, the new bank will contact your old bank
and switch all direct debits and standing order payments. But you will normally
have to contact your employer and anyone else who makes regular payments into
your account. Changing should take less than a month. Moving money to a new
savings account is easier. Open the new account with, say, £10 and when it is up
and running move your other money there. During the move the banks will hang on
to it for at least four days and pay no interest.
You can check rates at www.moneyfacts.co.uk or www.moneysupermarket.com but beware those introductory rates which hide themselves among the genuine best buys. The banks quote what is called Annual Equivalent Rate or AER. Many of the comparison services use gross rates which are less if the interest is paid monthly because the interest is paid to you each month and will itself earn interest. An annual gross rate of 4.17% with interest paid monthly is the same as an AER of 4.25%.
How it can work
Malcolm and Janey have just retired. They keep quite a bit of money in their
current account so they can use their credit cards pay them in full by direct
debit. They have reasonable pensions from their jobs and both got a lumpsum
which they have added to their savings which are currently in a LloydsTSB
Instant Gold Savings account earning 1.35%. They opened it years ago when it
seemed a good deal. But like so many accounts with ‘gold’ in the title it is now
terrible. Their current accounts are also with Lloyds. They have one each – they
like the independence – and their monthly income after tax is now just under
£1000 each and they each keep around £1000 in it.
September 2005