Avoid this massive savings mistake

Think you're safe with a best buy savings account? Think again. If you want to get a good return on your savings, you better not make this expensive mistake...

Banks and building society are supposed to inform you when the rate is due to be cut on your easy access savings account. In reality, that warning doesn't always get through. And even when it does, savers don't always act on it.

Neglecting your savings is one of the worst mistakes you can make. Remember, plenty has changed in the savings market over the last year, meaning that old accounts are likely to be paying pretty rubbish rates now.

Don't assume the best-buy accounts of the past will stay at the top of the tables. This almost certainly isn't the case. So, with this in mind, let's go back in time to the top accounts at the beginning of 2009 and find out what rates savers are earning on these accounts now:

Best-buy instant access savings accounts - January 2009

In some cases, the rate you'll be earning now will be far below the initial headline rate that caught your eye in the first place. The ING Direct Savings account, for example, has dropped from a highly competitive 5% to a less than impressive 0.5%. Meanwhile, the Egg Savings Account has dropped off from 4% to an underlying rate of just 1%.

You may have noticed that many of these accounts include bonuses which effectively top-up the overall rate paid. We have always warned you to keep track of when the bonus is due to disappear because once it has gone your return will dramatically reduce.

But the reality can be even worse than that. Sometimes the underlying rate you'll be earning today on the original sum you invested is lower than the rate you'd get if you invested new money in the same account. All of last year's best-buys are still available in 2010. Let's take a look at the rates currently on offer if you invest new money:

What are these accounts paying now on new money?

New savers who go for the ING Direct Savings account will earn 2.5%. fixed. But if you had an old account from January 2009, you would only be earning 0.5% variable as we have already seen. It hardly seems fair to me that savers with money deposited in what is essentially the same account will get such dramatically different returns.

You may be wondering, what's to stop you taking money out of your old account and re-depositing it in the 2010 version to take advantage of the higher rates? Well, you may come up against rules which prevent you from doing so.

For example, the new rate of the ING Savings Account is restricted to new ING customers. You'll only be deemed a new customer as long as you haven't held an ING Direct Savings account in the last six months. It's a similar story with the Egg Savings Account. The account is limited to new customers and new money which hasn't previously been held in an Egg Savings account.

Some of the providers have played a bit more fairly when it comes to these fast-diminishing rates. Tesco Finance savers, who took out the Internet saver in January 2009, were contacted back in December in advance of their bonus expiring this month. Instead of reverting to the bank's standard savings rate - which is currently 1.25% - they were offered the same terms as new Internet Savings customers. This means the rate is 2.75% including a year-long bonus of 1.5% on both 2009 and 2010 accounts alike. Well done, Tesco!

Meanwhile savers at Anglo Irish Bank who took out an account in January 2009 are now earning a rate of 2.25%. It's true this rate has dropped noticeably from 4.55% during the year. But it's actually higher than the 1.6% rate paid on the new Issue 3 version of the account. Now that is a rarity!

Best buys for 2010

It's really no surprise to see that the best savings rates at the start of 2009 are streets ahead of where they are now. That's been an unavoidable consequence of the financial crisis which saw a plummeting base rate drag savings rates down with it.

So let's not get too hung up on the fact that rates are significantly lower today. There's not much we can do about that. But what we can do is make the most of the best rates the market has to offer now.

If you have cash languishing in an old best-buy which is now a shadow of its former self, you should consider moving it into one of these top accounts:

Best-buy easy access savings accounts - January 2010

You'll see these accounts pay better rates than the former January 2009 best-buys can muster now. The market-leader - Coventry Building Society 1st Class Postal - pays 3.3% including a 1.3% bonus for 12 months - that's 0.55% better than the Tesco Internet Savings. This is why it's so important to review your account from time to time and compare savings rates.

I will just point out here that savers are able to make instant, penalty-free withdrawals from the Coventry BS account, but only four times a year. Additional withdrawals will incur a loss of 50 day's interest.

Likewise, the Lloyds TSB Incentive Saver pays 3.04%, but you won't earn interest during any month in which a withdrawal is made. Don't forget, some banks have a very unusual interpretation of 'easy access'! You should always watch out for catches like this whenever you move your money to a new best buy.

The Scottish Widows Bank Internet Saver pays marginally less than the Lloyds account, at 3.01%, but it doesn't have any catches you need to watch out for. It offers full instant access, without any interest penalties for withdrawals.

Finally, make sure you join our Build up your savings goal where we'll give you all the help you need to carry on making the most of your savings. And if you have a question about your nest egg, why not ask other lovemoney.com readers what they think at Q&A?

Compare savings accounts at lovemoney.com

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