The problem of savings accounts with names suggesting a competitive rate of interest, but which actually pay poor rates, has been raised in parliament.
A number of banks and building societies offer so called “premium” and “gold” accounts suggesting higher than average rates of interest, when many actually pay paltry rates.
A parliamentary question on the problem has led the pensions minister to call for the financial regulator to address the problem.
In response the Financial Services Authority (FSA) has said that banks and building societies will be included in its review of investment names. The review will look at names which imply greater levels of return or safety than is possible.
However, it could be some time before we see banks and building societies forced to change this bad practice as the review is still at the “discussion” stage.
Savers need to take action
Consumer groups believe that banks and building societies rely on consumer inertia and lack of knowledge when it comes to changing their accounts and shopping around for the best savings rates. This means that banks and building societies can get away with offering uncompetitive interest rates, often at the end of a bonus interest rate period.
Experts have warned that with high inflation and historically low interest rates, it has never been more important to shop around to get the best possible interest rates.
A basic rate tax payer needs to earn 5.63% on their savings to keep pace with the Consumer Prices Index (CPI) which was 4.5% last month. There are currently no accounts which provide this rate of return, whilst there are some Cash ISAs available which will meet this target, to get an inflation beating return savings do need to be tied up five years.
See which savings accounts beat inflation by following the link.
Lack of consumer knowledge can be addressed by looking as best buy savings tables, however only the consumer themselves can overcome their individual inertia.
An investigation by the consumer magazine, Which? in 2010 showed that one of the worst examples was from the Newcastle Building Society who’s High / Extra High Interest Account paid just 0.01% interest on all the balance. Although this account was closed to new money many years ago, until recently it still had savers with active accounts.
Other examples include the Dunfermline Building Society’s Gold Account which pays just 0.1% interest or the Midas Gold Account from Northern Bank which also pays a paltry 0.1% on all balances, irrespective of size.
The investigation highlighted both the issue of low interest rates and also institutions giving accounts potentially misleading names, which may have been accurate when the account was launched but become inappropriate as interest rates fall.