With 30,000, a tiered 3% account pays 400 and a flat 2% account pays 600. How to compare them.
Key findings
- The advertised rate often applies only up to a maximum balance.
- With 30,000, an account paying 3% up to 10,000 and 0.5% above pays 400 a year: 1.33% effective.
- An account paying 2% on the whole balance pays 600. Always compare the effective rate on your balance.
The advertised rate is not always what you get
Many savings accounts pay a high rate only up to a certain balance and a much lower one above it. The rate in the advert is the first tier. To know which account suits you, you need to work out what each one pays on your balance.
An example with two accounts
Compare two hypothetical accounts:
- Account A: 3% a year up to 10,000 and 0.5% on anything above that.
- Account B: 2% a year on the whole balance.
| Balance | Account A (3% with tiers) | Account B (2%) |
|---|---|---|
| 10,000 | 300 a year | 200 a year |
| 30,000 | 400 a year (1.33% effective) | 600 a year |
With 10,000, A wins. With 30,000, B wins even though its rate is lower: A only pays 1.33% effective on the whole balance. Both pay the same at about 16,667: about 333 a year.
The figure that matters: the effective rate
Divide a year's interest by your balance. That is the account's effective rate for you, and it is the one to compare between accounts and with a fixed-term deposit. Check as well:
- How long the rate lasts. Many high rates are promotions for a few months.
- The conditions: paying in your salary, using the card or taking out other products.
- Account fees, which come off what you earn.
- Tax on interest, which reduces the final figure.
What about a fixed-term deposit?
A deposit usually pays a fixed rate on the whole amount for a set term, in exchange for not being able to withdraw without a penalty. To compare, use the effective rate and the term. And compare both with inflation: if the return is lower, your money loses purchasing power even as the balance grows.
Compare accounts with your balance in the savings account comparison, and check how much inflation takes in the inflation calculator.