Simple Pound

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According to the BBC, 69% of no-notice savings accounts pay interest that isn’t even sufficient to cancel out current inflation rates. In March the Retail Price Index (RPI) was up 4.8% from March 2006 - which means, if your bank is paying anything less than those 4.8% your money gets effectively de-valued while sitting in your savings account.

That is certainly the case with my Lloyds Online Savings Account, which currently pays a monthly interest of 4.65% AER. This rate already includes a 0.6% bonus paid for one year from opening the account, so if I was going to stay with them in the long run, my gross interest would drop to 4.07% in July.

Well, 4.65% at the moment isn’t that bad you might think - but here’s another catch: tax. All the interest you’re earning is taxed at currently 20% - so the net interest that eventually ends up in your account is only 3.72% including the bonus. Oh and did I mention that these rates don’t apply for anything in the account from £0 - £250. No… for the first £250 I get a net interest of 0.08% - that’s an eighth of a percent!

So, what should this rant tell you? If you belong to one of those people who have an account that doesn’t even match inflation anymore, then switch. And do so right now because you’re losing free money!

I have been looking around for good rates for quite some time now (in anticipation of my sign-on bonus needing a home), but it wasn’t until a friend recommended his savings account that I came across Icesave.

Icesave is a subsidiary of the Icelandic bank Landsbanki Islands, which was established in 1866 and is (apparently) Iceland’s first and longest running financial institution. They have only recently appeared on the UK market, but have already established operations in 13 other countries. Why am I telling you this? Well, when it comes to the bottom line banks are institutions just like any other company and thus there’s always a risk of them going bust. This risk is greater, the smaller the institution - so I think it’s reassuring to know that there’s a larger apparatus in the back.

Anyway… facts now: Icesave offers you an online savings account with 5.7% AER (5.56% if paid monthly), which comes down to 4.56% net interest after 20% tax. Funnily enough that’s scarily close to what I currently get in gross interest with Lloyds - but only if you include a bonus! This is by far the best rate I’ve found on the web - and it comes with almost no strings attached. That means no penalties for withdrawing money, no notice periods, but there is a minimum investment of £250 (and a maximum sum of £1,000,000 in case that matters to you).

Reading through various forums online, people are usually concerned about the response time of online banks, because - after opening an account - you are send your User ID by post - which in one case apparently took 8 weeks (?). After that all communications with the bank will be handled through the Internet or a (0845) customer service hotline.

I tested Icesave’s responsiveness by sending an email to customer services asking about details regarding the calculation of interest (when, how often etc) yesterday afternoon. I got an automated response saying that due to high demand for their account a reply could take up to 5 business days. Grmph, I thought (or something very similar). But then I got a very lengthy and detailed reply this morning… It’s not an instantaneous response, but not bad either.

I am basically now running out of tricks to test them (I couldn’t think of many other questions after reading their FAQ’s online). Since I don’t have the money to open the account at the moment anyway, I’ll just keep watching them closely for now. But unless I come across some really concerning information in the meantime, I’m pretty sure I’ll be opening an account with them in June/July…

Please leave a comment if you’ve had any experience / know anything about Icesave and their online savings account (any other comments welcome too… ). People having to make decisions tend to look for information supporting their initial “gut feeling”, so throw all the bad news at me that you can find…

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