This piece first appeared in Saga Magazine in January 2004
The text here may not be identical to the published text

 

Banking on change

Worth moving from zero interest current accounts

It is New Year already. And what better resolution to make than this – I will give less money to my bank in 2004. Banks rely on us being a bit lazy, a bit afraid of change, and a bit ignorant about what is available. But if you have the information and you act on it you can put your money to work and let the banks keep less of it.

Current account
Most people have a current account to keep their money in. And most banks pay virtually no interest on this money. The four main High Street banks pay just 0.1%. In other words if you have an average balance of £100 in your current account over the year, you will get interest of just 10p – and that is before tax!

But you can do better, a lot better. Cahoot – owned by Abbey (it dropped the National from its name recently) – pays 3.1% (3.2% if do not have a chequebook). Interest is paid monthly and there are no rules about how much you pay in or take out each month. Cahoot does not have branches – you have to operate the account over the phone or through your computer. Money – including your pension – can be credited automatically and if you get a cheque then you post it to them in a freepost envelope. You get cash out of any Link cash machine with a card. It is very simple.

If you want a branch, then Halifax or Bank of Scotland will pay 1.51% on anything over £500 in your current account. And if you pay in £1000 a month or more it will pay 2.53% on the whole lot. Lloyds TSB also pays 2.53% if you pay in at least £1000 a month or 3.2% if you pay in at least £2000 a month. But you only get these rates on amounts in your account up to £5000 – above that you revert to the standard 0.1%.

Recently Lloyds offered 1% more than these rates for a limited period for new customers. These special offers are there to tempt you to move your account. So be careful to check what rate is paid after the offer ends.

Moving
Moving your account is easier than ever. Step 1: choose your new bank. Step 2: apply to open the account. Step 3: the new bank contacts the old bank and moves all your standing orders and direct debits automatically. Step 4: you tell anyone who pays you regularly – Department for Work and Pensions, employer, pension provider – about the move and give them the new bank details (some banks will do this for you). Step 5: close your old account. Step 6: count the interest you are earning.

It is all very simple, but it does take a few weeks and a bit of paperwork.

Savings
Interest rates are now moving up rather than down, which is good news for savers. But they are still as low as they have been since the 1950s so it is more important than ever to get the very best rates on the savings you have.

If you want a branch to call into, you pay a heavy price for that. At the time of writing the best branch based rates are Scarborough Building Society starting at 3.3%, but it only has nine branches. Alliance & Leicester EasySaver is close at 3%. You can also get 2.35% from Tesco – though if you have £50,000 or more it pays 3.5% - and you can pay in and take out money at most Tesco shops.

For the best rates you have to bank over the telephone or through your computer. The best buy is ING direct. It pays 4.3%, the interest is credited each month and there are no restrictions. You can operate it through the phone or your computer. ING has been consistently the best savings account since its launch in the UK in May 2003.

You may see higher rates. But many rates that appear in best buy tables are only there because they have a short-lived special offer to tempt you in. If you are happy to move your money every six months then you can take advantage of them. But most people do not want to do that. So go for one that has a good record and no special offers for new customers. Even then, you should compare the rate you get with others at least once a year. It is not really worth swapping for an advantage of less than 0.05% - you will lose that much through the four days’ interest you lose when your money is moved.

Clearing
Even when money is moved electronically between two banks they insist on hanging on to it for a few days. It is called the clearing cycle. When you give your instruction the money leaves your account and stops earning interest at once. A system called BACS then checks the money is good and makes the transfer from your bank to the destination bank. Each part of this process takes a day. So if you transfer money on Tuesday it cannot arrive at the other bank until Thursday. Once the money has arrived that bank often keeps it for another day or two before paying it to your account. Nothing is transferred at the weekend or on public holidays so the average delay is more than four days. During this time the banks invest your money on the overnight market currently earning 3.15%.

The banks say it would be too expensive to speed things up and in any case there is no demand for it. Swedish banks said similar things until the Government there stepped in. Now when a Swede pays money in the morning it arrives in the afternoon.

Internet
Many people do not have a computer at home – or if they do they are concerned about the cost or the security of banking on line. But internet banking has three big advantages. First, you can earn the very best rates of interest on your money. Second, you can check your balance and what payments have gone in or out at any time of the day or night without leaving home. Third, you can transfer money to pay bills, to other people, or to your other accounts easily and quickly.

Security is not a problem as long as you never give anyone your password or security details. Some criminals do send out mass emails which appear to come from the bank asking for information. Ignore them – they are always a scam. If someone stood by a cash machine asking for your PIN you would not give it to them. Do not answer these emails either.

Tax
The interest earned on your money – in current or savings accounts – automatically has 20% deducted for tax. If you do not pay tax (annual income up to £4615 if you are under 65; £6610 if you are 65-74; £6720 at 75+) then you can get your interest paid gross by filling in form R85 from your bank. You can claim overpaid tax back for up to six years. If you pay tax at the lower 10% rate (up to £1960 on top of the tax-free allowances) then you can claim half the tax deducted back at the end of the tax year. If you are married or live with someone you trust completely and they pay no tax, why not put the money in their name so it earns interest tax free?

AER
You may see two different rates of interest quoted for the same account. One is the gross rate, the other is the AER or Annual Equivalent Rate. If interest is credited once a year, both rates are the same. But if interest is credited monthly, the AER will be higher. That is because if your interest is paid monthly and you leave it in your account it starts earning interest on itself. So interest paid monthly earns more money over the year. So 3% gross paid monthly is worth 3.04% AER, in other words 3% paid monthly ends up the same as 3.04% paid once a year. Finance companies tend to quote the AER because it is higher than the gross rate. But that is a bit of a cheat. They want to quote you the rate of interest assuming you do not take your money out AND tempt you with it being paid monthly. In other words they want to have it both ways. But if you do not take your monthly interest out as income, the AER is a fair way to make comparisons. All rates in this piece are AER – in other words the percentage your money earns during the year if you do not spend the interest.

Complaints
Almost all banks and building societies subscribe to the Banking Code which sets out how they should treat customers, including dealing with complaints and letting you move your account easily and fairly quickly. You can get a copy of the Code from your bank or building society or over the internet.

Further Information
Banking Code information and copies of the Banking Code

Comprehensive interest rate information at Money Facts and moneysupermarket

It is worth looking at more than one ‘best buy’ list as they use different criteria and some may be influenced by the commission they are paid.

January 2004


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