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Protect your savings from the zombies

SCOTS are feeling better about the economy and saving a bit more.

That's the tone of a raft of recent surveys, including one from National Savings & Investments (NS&I) saying Britons are saving an average 8.2% of our income, up from 6.9% a year ago. And Scottish savings pots have increased from £2561 in December 2013 to £3383 this month, a rise of 32%, according to an Aviva study, helped by typical amounts owed on loans falling from £1941 to £844 and on payday loans dropping from £769 to £162.

NS&I said that 60% of those who are more likely to save over the next three months are aged 16 to 34. But where will they put it?

According to the Financial Conduct Authority (FCA), 76% of savers haven't moved their money in the past three years, and banks earn big profits from their most loyal customers by paying them poorer rates in 2000 "zombie accounts" - those that are closed to new business.

According to this month's interim report into the savings market from the regulator, there is "a minority of very active, very engaged consumers who regularly change provider to get the best deal", but banks and building societies "are able to pay lower interest rates to customers who have stayed with the same account for a number of years".

While paying lower rates to the apathetic 76% of customers who don't change accounts regularly, institutions use two techniques to attract new business: short-term bonuses, and "product replacement", where the newest accounts carry the best rates.

The 21 savings providers in the FCA sample had around 400 easy access accounts open for savings, but more than 2000 closed accounts - and the firms launched a hefty 300 new accounts in 2013, an average of 15 each.

The FCA said the deliberate "product proliferation" can make savers believe they have the best-paying account when in fact it is an older version with a similar name to their bank's current higher-paying version. And whereas anyone opening an account with a temporary bonus at least knows when it will end, with other new accounts, the FCA said it is "far more difficult for consumers to assess at the point of sale whether it is their provider's strategy to gradually make their rates less competitive over time".

The FCA noted that Royal Bank of Scotland and HSBC have ended the promotion of "teaser rate" products - but this means 19 of the 21 institutions it looked at, including mutuals such as Nationwide, continue to use them.

The FCA is now planning to make it easier for customers to understand what they are getting, and to switch accounts if they want to.

Anna Bowes, co-founder of independent advice site savingschampion.co.uk, said: "We believe that the FCA's intervention would be hugely valuable in helping to keep savers fully informed of the interest rates they are (and could be) earning and in encouraging the simplification of switching."

But Andrew Hagger at financial research website moneycomms.co.uk said: "It's not really surprising that many consumers aren't moving their nest eggs to chase marginally better interest rates. For those with bigger balances, the potential interest reward makes switching accounts a worthwhile exercise, but for those with less cash tucked away it's more down to apathy and low additional reward."

He said for anyone with small savings balances, a better strategy was to instead switch their current account - perhaps to TSB Classic Plus (5%), Lloyds (4%), Tesco Bank (3%) or Santander (3%) - where in-credit interest offered "a far better alternative than traditional savings products".

And Charlotte Webster of campaigning site Move Your Money said: "We're seeing some very interesting innovation from smaller banks, building societies and the alternative finance industry … with cash flowing into investments and savings that offer both a decent return and support positive development."

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