Money Tip #100 – The dangers of chasing the best savings rates

In today’s low interest – high inflation rate world securing the highest savings rate possible may seem intuitive. But it could do you more harm than good.

(Updated 1st January 2011)

Well we’ve made it to Money tip #100 and as predicted there are many more Money Tips still in the tank. So while we give ourselves a pat on the back read on.

Any sensible saver would look to secure the highest interest rate possible on their savings. In fact many a well-known website will send you email after email with the latest top savings rates. But while the basic premise of this course of action is right, there are a couple of pitfalls.

Firstly, if you’re looking to chase rates be careful where you switch to. As mentioned in our post Money tip #99 – How to protect your savings from your bank going bust you need to ensure that the destination bank/building society is registered with the Financial Services Authority (FSA) - (check their website www.fsa.gov.uk/) . If they are not then you will not be covered under the Financial Services Compensation Scheme (FSCS) if they go bust. So while Offshore accounts often offer the best rates out there they are not usually covered under the FSCS.

Furthermore, ensure that you don’t hold more than £85,000 (or £170,000 for joint accounts) with each registered institution if you want all your savings covered under the FSCS. Some banking groups are treated as one entity despite you holding accounts with different brands within their organisation. (again read Money tip #99). Indiscriminately switching could cost you if the banking sector faces another meltdown.

Sometimes, particularly if very large sums are involved, it is difficult to keep your various accounts within the FSCS limits. In these instances it pays to consider an institutions credit worthiness before parting with your cash (here's how to check a bank's credit worthiness).

Finally, ask yourself the question, why is this institution offering such a good interest rate? It is likely that they are desperate for your money and have to offer eye-catching rates to persuade investors to part with their cash. Shortly before Iceland’s Kaupthing bank collapsed they were offering market leading rates. Any investor who jumped in with both feet got a nasty shock.

So the moral of the story is that every financial decision, no matter how seemingly simple, should be given the necessary care and attention.