Savers find problems in paradise

More and more accounts are paying over 5 per cent, writes Melanie Bien, but don't expect them to make your life easy

Their returns have languished in the doldrums for years but all of a sudden savers are being spoilt for choice, with yet another provider launching an account paying more than 5 per cent interest.

Their returns have languished in the doldrums for years but all of a sudden savers are being spoilt for choice, with yet another provider launching an account paying more than 5 per cent interest.

While such heady rates are welcome, however, savers should check the small print before committing their funds to an account offering an exceptionally good rate of interest. There is often a catch and mouth-watering deals aren't always what they seem once you read between the lines.

Last week, Sainsbury's Bank announced that it was offering savers a fixed 5.4 per cent gross return for one year. This is a fairly straightforward deal, although there are restrictions that savers should be aware of. Your cash is tied up for a year with the Sainsbury's account, so you must ensure you don't commit funds that you might need within the next 12 months.

You can make a withdrawal in case of emergency before the account matures, as long as you have less than £50,000 invested. However, you will incur a fee of 5 per cent of the amount taken out for doing so. And you can only make a withdrawal if the remaining balance in your account is greater than £3,000. This is also the minimum opening balance.

With any fixed-rate savings account or bond, watch out for penalties on early withdrawal of funds. If, though, you are prepared to tie your money up for a length of time, and are confident you won't need to get your hands on it before the investment matures, you can usually get a better rate than if it is in an instant access account. Portman building society is paying 5.6 per cent on its Rollover Bond, for example. This is fixed for one year but you must have at least £2,500 to invest. The penalty for early closure is 90 days' interest.

Although fixed-rate savings deals can look uncompetitive if the Bank of England base rate rises dramatically during the next 12 months, at least you know what return you are getting. However, watch out for providers which offer a good headline savings rate but only because this includes a juicy bonus: this is a common ruse for getting to the top of the "best buy" tables. Once you have signed up and the bonus has long since expired, you can find yourself receiving a far from impressive rate of interest.

Northern Rock's Tracker Online savings account pays 5.01 per cent interest, for example, which at first glance is up there with the most impressive offerings. But delve a little deeper and a less rosy picture emerges: this deal includes a bonus of 0.7 percentage points for six months. After that time, the rate is 4.31 per cent.

Internet bank Egg was also offering new customers 5 per cent on savings for six months, but it has since withdrawn this and is now paying 4.25 per cent to all customers - new and existing ones alike.

Unless you are prepared to move your money again once the introductory bonus period has ended, you should choose an account that pays a consistently good rate of interest.

The best way of doing this is to opt for an account with some sort of guarantee. Intelligent Finance is paying 4.6 per cent interest on its mini cash individual savings account (ISA), for example, and prom- ises that the rate will be at least 0.3 per cent above the base rate until 31 January.

Yorkshire building society also launched a Guaranteed Savings Tracker recently. This promises to pay the higher of 5.25 per cent in interest or the Bank of England base rate (currently 4.25 per cent) over two years. So even if there are several increases in the base rate, taking it above 5.25 per cent within those two years, savers won't miss out on those increased returns.

And if the Bank of England brings down the cost of borrowing - although admittedly market commentators aren't forecasting that this will happen - savers will still be sure of getting the 5.25 per cent.

To make this deal even more attractive, the minimum investment is an accessible £100. However, you can't access your money during the term unless you close the account and suffer 180 days' loss of interest.

Watch out for accounts that let you withdraw cash but impose conditions on the amount you can take out. For example, Leeds & Holbeck building society insists customers in its Direct Saver Plus account, which pays 5 per cent gross interest, withdraw a minimum of £1,000 a time. This may be far more than you need.

To maximise the interest you earn on your savings, make the most of your tax-free ISA allowance. Anyone over the age of 16 can invest up to £3,000 tax-free per annum (£1,000 from April 2006) in a mini cash ISA. Cheltenham & Gloucester is offering one of the better rates, paying 5 per cent interest fixed for one year on its mini cash ISA. The minimum opening balance is £1,000.

If you don't wish to tie up your savings for a set period, and can't meet the high minimum balances that many providers insist on, this doesn't mean you have to put up with rubbish returns; a number of instant-access accounts offer good rates. Alliance & Leicester's Online Saver account pays 4.85 per cent interest gross on balances of £1, while ING Direct pays 4.6 per cent on the same amount.