Boosting your rate

Banks and building societies regularly use large short-term bonuses to boost the rates they offer on savings accounts. The majority of accounts with bonus rates are easy access accounts.

Although a single rate is quoted initially, there will be an explanation telling you that this interest rate includes a bonus. They're easy to spot as the note tells you the size of the bonus and how long it runs - for instance, 1.5% plus a 1.5% bonus for the first 12 months, making 3% in all.

What to watch out for

The interest you receive on an easy access account is usually variable, meaning it could go down or up at any time. In contrast, the bonus rate is usually fixed. This can offer some reassurance (in the current climate especially) that even if interest rates drop, your savings rate won't fall below the bonus rate. So if you had an account paying 3% with a 2% bonus, you know the rate can't fall below that 2%.

However, bonus rates only run for a short time, often just a year. Once the 12 months are up, your savings will revert to the basic interest rate and carry on earning this lower rate until you move your money into a new savings account. You should also note some easy access savings accounts come with a variable bonus rate. This means you have no guarantee the entire interest rate won't suddenly fall. In fact, it's hard to even call it a bonus.

You should also note that some easy access savings accounts come with a variable bonus rate. This means you have no guarantee that the entire interest rate won't suddenly fall. In fact, it's hard to even call it a bonus.

You should also watch out for any other restrictions put on the account. There may be limits on whether you can draw out any money while the bonus is running or you may only be allowed a limited number of withdrawals up to a certain amount during the bonus period. If you make more than the permitted number of withdrawals, you could lose interest on the amount you withdraw for that particular month.

Some of the market-leading bonus accounts may also require you to invest a certain amount to open them or may want you to maintain a minimum balance. This sum could be anything from £1 to £20,000, so keep an eye on it.

Don't forget to switch!

While accounts with fixed bonus rates can be useful in a low interest climate, it is vital to make a note for a few weeks before the bonus comes to an end to compare savings rates so you can move to a better paying account when necessary.

If you don't switch when the bonus period ends, then the chances are your savings will be earning a much lower rate of interest than they could be elsewhere.

EXAMPLE

You go for an account paying 3% with a bonus of 2% for 12 months. After this period, the rate drops to 1%.

You start with an initial investment of £1,000 and save £300 x 12 = £3,600

·         Total savings after one year for basic rate tax payer = £4,600 + £70.63 in interest = £4,670.63

Option A

·        You don't switch and leave the money in the account for another 12 months.

But you maintain the £300 monthly deposit, earning only 1% without the 2% bonus.

Total nest egg after two years £8,323

Option B

·         You switch to a new account paying 3% for 12 months

And maintain the same £300 monthly deposit for a year

Total nest egg after two years £8,430

Over the two years:

·         You will earn £123 in interest if you don't switch after 12 months.

·         But if you do switch, you'll earn an extra £107 in interest. Over the two years you will earn £230.

If switching accounts every year seems to be a lot of hassle, and you know you'll never do it, you may find you're better off moving to a bonus free easy access account.. Although this is likely to mean you'll earn a lower interest rate overall (for the first year anyway), if your savings will otherwise be left in an account earning next to nothing after a bonus rate expires, this could be a better option.

In fact, if you moved your original £1,000 to an account paying 2.85% with no bonus and continued to pay in £300 a month, you'd earn a total of £217.82 in interest over two years. This is considerably better than Option A above and it's not far behind the £230 you would earn in Option B. Just don't forget because it's a variable rate account, there's nothing stopping your provider from lowering (or of course, increasing) the interest rate on your account.