Don't be tripped up by savings 'bonuses'

A 'bonus' is usually deemed as a good thing but - when it comes to savings accounts where the bonus is already embedded in the rate you see - they can be something of a mixed blessing. In other words, to make the most of savings bonuses, you will need to keep on your toes.

Keep an eye on bonuses

Santander for example recently hiked the rate on its Easy Access eSaver Issue 5 account to 3.20%, trumping the previous market leader - the Post Office's Online Saver which paid 3.17%.

However, the great headline rate, which is payable on £1 or more, includes a whopping 2.70% bonus of 12 months.

This means that after the first year, the rate savers receive will drop to a measly 0.50%.

Those with the Post Office account, on the other hand, will see their headline rate fall by a smaller 1.52%, putting the rate after the first year on this account at a less stingy 1.65%.

Forgetting to switch your savings to a new account when the bonus period comes to an end will therefore have a much smaller impact on returns with the Post Office account.

Accounts offering higher rates than 1.65% will almost certainly be available at the time, though, which is why it is vital for all savers with bonus-paying accounts to be prepared to move their money regularly.

Why have savings account bonuses become so popular?

When banks and building societies launch market-leading savings accounts, the aim is to attract lots of new customers looking for a competitive deal.

However, with the Bank of England base rate continuing to languish at just 0.50%, offering rates of over 3% does not come cheap.

Account providers have therefore hit upon the cunning plan of advertising fantastic headline rates that include hefty bonuses, thereby allowing them to slash the headline rate after the first year.

This tactic allows them to attract new customers with market-leading deals, but it also means they can make extra from the thousands of savers who forget to move their money once the bonus period comes to an end.

The problem for consumers seeking decent returns on their savings, however, is that pretty much all the best accounts on the market now come with a bonus attached.

Propping up the two top easy-access accounts mentioned above, for example, are ING Direct's Savings Account at 3.15% (including a 2.61% 12-month bonus) and Nationwide Building Society's Online Saver Plus at 3.06%(including a 1.52% 12-month bonus).

Are all bonuses the same?

As described above, the percentage of the headline rate that is made up by the bonus will affect the rate you receive should you fail to switch to a new deal after 12 months.

But the size of the bonus is not the only thing to look out for when comparing accounts. Some are fixed and some are variable.

Fixed or variable:

The 1.55% bonus payable on the Tesco Bank Internet Saver account, which pays 2.80% for example, is fixed. This means that the bonus period will not rise or fall - even if the base rate moves up or down.

With the bonuses attached to other headline rates, however, there is no such certainty. So, not only could the underlying rate change, the bonus could too.

The length of bonus:

Some bonuses also last for longer 12 months. This is case with the Allied Irish Bank Savings Direct Easy Access Reward Account. The deal pays 3.00%, including a 1.50% bonus, on deposits of £1 and above. But while the underlying rate of 1.50% is variable, the 1.50% bonus is fixed for five years - as long as you make no more than four withdrawals a year during that time.

Are there any bonus-free accounts?

While the top easy access accounts all have bonuses, there are still some competitive alternatives for savers who do not want to move their money every year or so.

The Aldermore Easy Access account, for example pays a bonus-free rate of 2.75% on balances of £1,000 or more. What's more, this rate on this account comes with a guarantee - that it will remain at least 1.70% above the base rate until March 2013.

Virgin Money's bonus-free Easy Access E-Saver is also offering a competitive 2.60% on between £1 and £100,000.

What about cash ISAs?

Interest on the accounts mentioned above is taxable. For example, the market-leading 3.20% paid by the new Santander account in the first year is worth just 2.56% to a basic rate taxpayer - and even less to a higher rate taxpayer.

Consequently, a cash ISA, with which you receive tax-free interest on up to a certain amount each year, should always be your first port of call.

As with easy-access savings accounts, however, you have to decide whether you want the best interest rate (including bonus) on the market, or are prepared to earn a bit less in the hope of not having to switch ISAs every year.

Savers with £1,000 to deposit can, for example, get 3.35% with Cheshire Building Society's Cash ISA.

But the headline rate includes a 2.35% bonus lasting until the end of November 2013, meaning they will almost certainly have to move their tax-free savings to avoid missing out on better rates within the next 18 months.

If you would prefer a longer-term deal, you may therefore be better off with the ING Direct Cash ISA, which pays 3.00% (guaranteed for one year) on £1 or more.

For even greater security, meanwhile, it could be worth opting for an ISA offering a fixed rate.

These include Santander's one-year Fixed Rate ISA paying 3.5% on at least £2,500 and Halifax's ISA Saver Fixed at 4.25% on £500 plus for five years.