Savings account interest passes a milestone, but there are catches

Soaring interest rates have delivered savings accounts an interest milestone, but experts say many people are wasting opportunities.

Interest paid by bank deposits is running higher than inflation for the first time since the pandemic, and savers are being urged to shop around and switch as the best rates eclipse 5.5 per cent.

Pensioners in particular are benefiting from high savings account interest because the government assesses them to be earning as little as 0.25 per cent for Centrelink means testing, despite many pocketing 5 per cent-plus.

Last week Rabobank Australia unveiled the highest interest rate on the market, an introductory offer of 5.75 per cent, before reverting to 4.4 per cent after four months.

Research group Canstar says it Rabobank’s high interest savings account is one of several product now paying at least 5.5 per cent – above the Consumer Price Index’s annual rate of 5.4 per cent.

Canstar’s Effie Zahos says tax is now an issue for some savers. Picture: Tim Hunter.

“Until recently, money in the bank was going backwards,” said Canstar spokeswoman Effie Zahos.

“It’s great news for somebody who is receiving a pension. They could find a high-paying account but the government is only deeming it at 0.25 per cent for amounts up to $60,400.

“Anything over that is 2.25 per cent, which is still very low.”

Ms Zahos said higher interest rates meant a potentially bigger tax bill for Australians.

“It’s a problem savers probably haven’t had to address for some time,” she said.

“Typically you don’t pay tax on any interest you earn until you do your tax return.”

People saving for a first home might be hit by extra tax, but they could examine strategies such as the First Home Super Saver Scheme that used the low-tax superannuation environment to build a deposit, Ms Zahos said.

Savings account interest has not been at these levels for more than a decade, and Ms Zahos said people should not be complacent by assuming they were getting a good return.

“You’d earn next to nothing if you had your money in the lowest-paying account,” she said.

“Unfortunately a lot of us still keep money sitting in everyday transaction accounts. These days it really does make a difference – the interest you earn could now pay your electricity bill.”

RateCity.com.au research director Sally Tindall said it was encouraging to see Westpac and NAB now offering ongoing savings rates above 5 per cent available to all adults.

“Big bank customers should check their money is in the right account, because all four majors are still offering existing online saver customers laughable rates,” Ms Tindall said.

“CBA’s online saver is the most generous at just 2.35 per cent. Westpac’s is barely off the floor at 1.10 per cent,” she said.

“Australians can and should do better than this.”

Comparison website Mozo.com.au’s spokeswoman, Rachel Wastell, said some of the best rates were only for new accounts, and high-interest accounts often had conditions including minimum monthly deposits.

Savers are being urged to compare interest rates and switch to a better deal. Picture: iStock

“If you’re looking for a high rate that doesn’t have an intro period, there are a number of bonus rate accounts offering rates starting with 5,” Ms Wastell said.

“The leading ongoing bonus rate available is currently 5.55 per cent per annum for the HomeME savings account from ME Bank, despite the bank cutting this rate by 0.1 per cent in late October, and ING, Teachers Mutual, Hiver and others are offering 5.5 per cent bonus rates.

“If savers do struggle to meet conditions, they may be better off with an unconditional base rate in the high 4s, like the ANZSave account from ANZ that’s currently offering 4.9 per cent per annum.”

People who had accounts with lower rates should shop around, Ms Wastell said.

“With the RBA cash rate now close to its expected peak, it’s unlikely rates will go much higher than they are now,” she said.

TOP RATES TODAY

Rabobank Australia 5.75%

ME 5.55%

Great Southern Bank 5.5%

Macquarie Bank 5.5%

ING 5.5%

MOVE Bank 5.5%

Teachers Mutual Bank 5.5%

source: canstar.com.au. (rates can include conditions or bonus periods)

Originally published as Savings account interest passes a milestone, but there are catches