Question
You have referred to the use of 'Introductory Bonuses' on some savings accounts as a marketing trick, which in principle I understand, namely the requirement to watch the 12 month anniversary date when the rate drops.
My questions relate to the possible implications of how these offers are worded, for example:
1. On the Egg website, I found this wording:
On balances up to £1,000,000* - 2.80% gross pa/AER variable (including an introductory 12 month fixed bonus of 1.55% gross pa from the date the account is opened).
On balances up to £100,000** - 2.50% gross pa/AER (variable) for first twelve months (includes 12 month variable bonus rate of 1.25% gross pa from the date the account is opened).
Obviously, the amount on which interest is paid is increased, however I also noticed that there is a subtle change in the way in which the bonus is worded, one is a fixed bonus and the other is variable - I wondered if you had a view on which of these is potentially better - I presume the future direction of interest rates is relevant?
2. I also wondered whether there is any relevance concerning the size of introductory bonus in relation to the total AER, in other words whilst the total rate is the same the bonus is markedly different?
(i) Post Office: Rate: 2.9% variable AER, inc 1.25% bonus. Online Withdrawal restrictions: None.
(ii) Santander Rate: 2.9% variable AER, inc 2.4% bonus for 12 months. Withdrawal restrictions: unlimited
Thanks for your help.Answer
Thanks for raising a very good point. Fixed savings account bonuses are normally preferable to variable because you know exactly what you're getting.
The trouble with variable bonuses is that the bank might reduce the rate during the bonus period, leaving you with a lower return than expected. While this may not be problem provided you can move the account elsewhere, penalty-free, it's a potential hassle as you'll have to regularly check the bonus to ensure it's not been cut.
The only exception I can think of is when the bonus applies to ensure a minimum rate during the introductory period, in which case it would probably need to be variable in case the underlying account rate falls.
Interest rate movements probably won't make that much difference to variable bonuses, it's more likely to be a case of whether the bank thinks it's profitable to reduce the bonus in light of customers they might lose and the negative publicity it may generate.
Anyway, other things being equal, I'd plump for a fixed bonus over variable.
The size of the bonus relative to the overall rate has a couple of potential implications. On the one hand a large fixed bonus is good, because even if the underlying rate falls you should still receive a reasonable return during the bonus period. The downside is that when the bonus does end you'll be earning a lot less interest, which could prove costly if you don't swiftly move the account to a better rate elsewhere.
Putting all this together. If you watch your savings closely and can move elsewhere quickly, without penalty, then I'd be fairly relaxed whether the bonus is fixed or variable and the extent that it comprises the overall interest rate. But if not then you may be best off opting for a fixed bonus that is high relative to the overall rate and try to remember to move elsewhere when the bonus expires.
You have referred to the use of 'Introductory Bonuses' on some savings accounts as a marketing trick, which in principle I understand, namely the requirement to watch the 12 month anniversary date when the rate drops.
My questions relate to the possible implications of how these offers are worded, for example:
1. On the Egg website, I found this wording:
On balances up to £1,000,000* - 2.80% gross pa/AER variable (including an introductory 12 month fixed bonus of 1.55% gross pa from the date the account is opened).
On balances up to £100,000** - 2.50% gross pa/AER (variable) for first twelve months (includes 12 month variable bonus rate of 1.25% gross pa from the date the account is opened).
Obviously, the amount on which interest is paid is increased, however I also noticed that there is a subtle change in the way in which the bonus is worded, one is a fixed bonus and the other is variable - I wondered if you had a view on which of these is potentially better - I presume the future direction of interest rates is relevant?
2. I also wondered whether there is any relevance concerning the size of introductory bonus in relation to the total AER, in other words whilst the total rate is the same the bonus is markedly different?
(i) Post Office: Rate: 2.9% variable AER, inc 1.25% bonus. Online Withdrawal restrictions: None.
(ii) Santander Rate: 2.9% variable AER, inc 2.4% bonus for 12 months. Withdrawal restrictions: unlimited
Thanks for your help.Answer
Thanks for raising a very good point. Fixed savings account bonuses are normally preferable to variable because you know exactly what you're getting.
The trouble with variable bonuses is that the bank might reduce the rate during the bonus period, leaving you with a lower return than expected. While this may not be problem provided you can move the account elsewhere, penalty-free, it's a potential hassle as you'll have to regularly check the bonus to ensure it's not been cut.
The only exception I can think of is when the bonus applies to ensure a minimum rate during the introductory period, in which case it would probably need to be variable in case the underlying account rate falls.
Interest rate movements probably won't make that much difference to variable bonuses, it's more likely to be a case of whether the bank thinks it's profitable to reduce the bonus in light of customers they might lose and the negative publicity it may generate.
Anyway, other things being equal, I'd plump for a fixed bonus over variable.
The size of the bonus relative to the overall rate has a couple of potential implications. On the one hand a large fixed bonus is good, because even if the underlying rate falls you should still receive a reasonable return during the bonus period. The downside is that when the bonus does end you'll be earning a lot less interest, which could prove costly if you don't swiftly move the account to a better rate elsewhere.
Putting all this together. If you watch your savings closely and can move elsewhere quickly, without penalty, then I'd be fairly relaxed whether the bonus is fixed or variable and the extent that it comprises the overall interest rate. But if not then you may be best off opting for a fixed bonus that is high relative to the overall rate and try to remember to move elsewhere when the bonus expires.
Read this Q and A at http://www.candidmoney.com/questions/question387.aspx
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