Competition in the savings sector is hotting up, with ECB rates climbing and Bank of Scotland Ireland's entry challenging existing players, writes Laura Slattery

Saving may not be as much fun as spending, but the pay-off for avoiding temptation can be rewarding, as long as sensible rainy-day anticipators choose the right home for their money.

In recent years, however, the rewards for thinking ahead have had little to do with the actual financial incentives on offer, the one obvious exception being the Government's €1-for-€4 bonus on Special Savings Incentive Accounts (SSIAs).

Outside the realm of SSIAs, the low interest rates set by the European Central Bank (ECB) have made deposit and regular saving accounts seem unexciting. With the token rates on offer always at risk of being beaten by inflation, the money could always erode in value in real terms. But while increasing interest rates are the bugbear of mortgage-paying homeowners, the ECB's decision to increase its key interest rate by a quarter of a percentage point in December should be welcomed by people with regular savings accounts or a lump sum on deposit, who will have seen their financial institution pass on most of the interest increase to their customers over the last few weeks.

Even more welcome will be the news that Bank of Scotland Ireland (BoSI) has introduced a new savings account with an interest rate that surpasses those offered by AIB, British financial institution Northern Rock and Dutch bank Rabobank.

BoSI's Monthly Saver account account boasts a variable interest rate of 3.75 per cent and is open to anyone wishing to put aside between €10 and €750 every month. The maximum amount that can be invested in the account is €50,000 and the maximum initial investment is €10,000.

The 3.75 per cent is based on the ECB interest rate, which is currently 2.25 per cent. The bank promises that the rate will stay at 1.5 percentage points above the ECB rate until January 2008.

Unlike the AIB, Northern Rock and Rabodirect offerings, which are all strictly available online only, the BoSI account can be operated through branches as well as by telephone or online.

The bank, which is part of the Halifax Bank of Scotland group, opened three branches last week - in Ballyfermot, Dún Laoghaire and Limerick - and will be opening a total of 46 branches over the next 14 months as part of its campaign to "shake up" the Irish banking sector.

Before BoSI's launch, the best annual savings rate around was the 3.25 per cent available on both AIB's online regular savings product and Northern Rock's online demand deposit account.

But in AIB's case, customers had to have a current account at the bank and as a result be charged transaction and service fees that they wouldn't at some, if not all, of the other banks that provide current accounts, thus cancelling out the benefit of the competitive interest rate to many small savers.

At Northern Rock, meanwhile, the minimum balance required is €1,000, higher than the €20 monthly saving required at AIB and the token €1 deposit needed to open a Rabodirect account. If the balance falls below the €1,000 minimum deposit will only receive interest at a rate of 0.1 per annum.

The Bank of Scotland Ireland account is, however, not as flexible as some of the accounts with lower interest rates. First of all, the amount saved each month can only be changed once a year. If more than two withdrawals are made in a year or the monthly payments cease, the interest rate will revert to just 1.75 per cent.

AIB, on the other had, structures its account so that disciplined savers who limit the number of times they dip into their funds receive bonuses.

Unlike most other savings account providers, who pay the annual interest earned at the end of the year, AIB pays interest on balances on April 1st.

Savers who make monthly lodgements receive a bonus of 10 per cent of the interest earned in year one, increasing to 50 per cent of the interest earned in year five.

At Rabodirect and Northern Rock, savers can withdraw their money at any time without penalty, although Northern Rock customers must pay a €25 charge if they want same-day withdrawals by electronic transfer.

On all savings accounts (with the exception of certain products known as Special Term Accounts) the interest earned is subject to Deposit Interest Retention Tax (Dirt), which is currently charged at a rate of 20 per cent. With inflation currently running at a rate of about two-and-a-half per cent, the real returns that savers can glean from simple savings and deposit accounts won't break any bank.

Once consumers have put enough money aside in an easily accessible account for unforeseen emergencies and their expected short-term needs, it may prove worthwhile to look at investing excess money into higher growth investment accounts.

These accounts are riskier, especially in the short term, but may yield much higher returns for people who won't need to rely on the cash in emergencies. Many investment products tie up the funds for a minimum of five years, with penalties for early withdrawal. And before they consider opening the kind of regular saving or lump-sum deposit accounts shown in the table opposite, savers should also take a number of steps.

Firstly, if they opened a five-year SSIA before the scheme deadline at the end of April 2002 and they are not currently paying the maximum €254 a month permitted, they should increase their contributions before opening any new savings account.

The Government's offer to pay €1 for every €4 saved is an effective bonus of 25 per cent on top of the normal interest or growth rate. Even if savers didn't open their SSIA until the last minute, they will be able to get their hands on an excellent return in a little over a year.

Secondly, it makes sense to concentrate on paying off short-term debts such as credit card bills before building up savings. Consumers typically pay double-digit rates of interest on credit card balances that are not repaid within the interest-free period. In other words, they pay substantially more interest than they could ever hope to earn on a humble savings account.

The same principle applies to mortgages. Homeowners might consider making lump sum or regular overpayments on their mortgage in order to save on the total interest that they pay over the lifetime of the loan.

But some mortgage lenders will be more flexible than others in terms of letting borrowers access that cash again if the skies later decide to break and rain financial misery down upon them.