If only savings accounts were all as straightforward as RaboDirect’s. Sadly the savings industry is full of shabby savings products and it’s up to customers to avoid these traps:
Shabby bonus saver accounts: bonus saver accounts are a great idea. Keep your money in for a certain amount of time, or make no withdrawals for a month and you get an extra bonus on top of an already good interest rate. The trouble is that some banks – and RaboDirect isn’t one of them – make it nigh impossible to get the bonus. Or the base rate is so poor that you may as well get a regular online savings account. The devil really is in the detail with these accounts. Like all accounts bonus saver accounts require some cunning by customers to get the best deal.
Meagre prize draw accounts: prize draw accounts allow you to save as well as be in to win monthly prizes ranging from $100 to a Mini Cooper. That’s fine if it’s a one-off competition and you’re getting a good interest rate anyway. The trouble is that you often get low or no interest on these accounts with some banks coupled with high fees. Only a few people will win the prizes and the rest get nothing. Some people may be better of satisfying their gambling urges by buying the occasional lottery ticket or putting a very small amount of money in Bonus Bonds.
Eroding interest rates: have you ever noticed with some banks how the account that once paid a good interest rate doesn’t anymore? Typically banks launch new products with great interest rates. To balance that out, they quietly drop the rates on the old product and fail to tell the existing customers. Investors need to choose banks that don’t have multiple products, or review their accounts every year.
Tricky insurance-linked savings: insurance companies and financial sales people love to sell insurance-linked savings – often called insurance bonds. They’re life insurance policies where a portion of your money goes into investments. They sound great when the salesperson describes them, but are really a mish mash of this and that. It’s hard to work out exactly what your money is earning. Usually returns are much better if you keep your life insurance and other investments separate.
Crafty capital guaranteed stock market investments: with capital guaranteed managed funds your money is invested in the stock market, but you're guaranteed a minimum of your capital back on maturity. For anyone scared of fickle stock markets, these risk-free investments may sound ideal. The pitfall is that these "all gain no pain" products come at the price of losing much of the upside thanks to higher charges associated with them. You don’t get something for nothing very often in this life.
Bad bank accounts: If you've had your account for a while, make sure you carry out an annual review and check the interest rate you're being paid. At the time of writing this, there were banks offering as little as 0.40% for online e-saver accounts, compared to 3.6% at RaboDirect.