Poor interest rates, severe penalties and archaic rules: old-fashioned notice accounts are past their sell-by date

07 November 2007
UK bank account holders have got hundreds of billions of pounds trapped in old-fashioned savings accounts that cannot be touched unless notice is given, locking up funds which are subject to appalling interest rates, according to research from Alliance and Leicester.

Banks and building societies have been slashing interest rates for notice accounts, safe in the knowledge that customers are trapped and risk hefty penalties for breaking the terms of the account and withdrawing their money before the notice period is honoured.

Alliance and Leicester's research has shown that those who hold such accounts would benefit from giving the required notice period and moving the funds elsewhere as soon as possible to avoid paying a penalty.

While notice accounts have traditionally been a good option for those savers wanting to get the highest rates of interest – a reward for not accessing their money; however, it appears that this is no longer the case.

Many offer very poor rates of interest and while savers think that they are receiving higher rates, the reality is that none of the notice accounts operated by the large banks even match the rate of inflation – running at 3.9 per cent - after tax. What’s more, the value of customers’ savings falls even further once the rise in the cost of living is taken into account.

In addition, banks and building societies are within their rights to cut their rates on these accounts at any time or even pass on less than any base rate rise without warning. Yet customers are bound by the account’s terms and conditions and must give the required notice period – which can be as much as six months – in order to avoid getting out without paying a financial penalty, which in some cases can be a loss of up to six months’ interest.

Modern accounts, on the other hand, can offer good interest rates – you can still opt for a notice account which will still place restrictions on customers accessing their money, but the rates and penalties are far more attractive. Even some of the old notice accounts, such as Abbey Investor and C & G Direct 30 and 90 day accounts, customers are no longer required to give notice to get out penalty-free.

Another smart saving scheme is a fixed-rate bond which will tie up your cash for a year, or, Skipton Building Society’s new Special Saver account pays a top rate of 6.04% after tax, which could be a good option for those looking to save between £10 and £250 a month. The account runs for 12 months and offers higher after-tax rates than most tax-exempt ISAs. Funds cannot be touched for the 12 months and are then automatically moved into an instant access account paying just 3.07%.

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