Should you move your savings into a current account?
Average savings rates on instant access deals are now just 0.51% while notice accounts pay on average a measly 0.29%, prompting some savers to consider current accounts as an alternative home for their money.
Between October 2008, when the Bank of England first started cutting the base rate, to January this year, the average interest rates on instant access savings accounts have fallen from 2.46% to 0.51%.
New fixed interest accounts have seen average rates drop from nearly 6% to just 2.35% and AERs on cash ISA have nosedived from 4.36% to 1.38%.
With some current accounts offering much more generous headline rates, some savers might be tempted to move their nest-egg and try and bump up their return.
A quick look at the best one-year fixed savings account currently on offer, and these current accounts suddenly look a lot more appealing.
ICICI Bank currently offers the best AER of 3.9%, on its 12-month fixed-rate HiSave account. Elsewhere, Coventry pays 3.75% until 28 February 2010, Derbyshire Building Society pays 3.75% or FirstSave pays 3.6% AER.
But putting your savings into a current account could be more hassle than it’s worth. For example, you will only earn 6% in A&L’s Direct Premier account if you pay in at least £500 each month. And balances over £2,500 will only earn 0.1% AER.
Seeing as 12 months worth of £500 payments would take your balance to £6,000, you would actually have to start withdrawing your money after five months in order to benefit.
Of course, this isn’t impossible – for the final seven months of the deal you could pay in £500 each month and then withdraw it to be placed in an alternative savings account. But obviously this requires a certain amount of effort on your part.
Likewise, Abbey’s bank account only allows you to save £2,500 over the first 12 months – and, to qualify for the 5.5% rate, you must pay in £1,000 a month. This means that you would have to start withdrawing money after the second month, to avoid exceeding the maximum balance on your third monthly payment.
According to Moneynet, the only current account that doesn’t have a minimum monthly payment is Cahoot’s. This deal also allows you to save up to £250,000 a year.
However, when you consider that you’ll only earn 1.25% interest, it looks a lot less attractive.
Regular savings accounts
If you are in a position to put away a set amount each month, then you’ll probably be better off with a regular savings deal.
Barclays pays 6% AER as long as you pay in between £20 and £250 each month. This rate is fixed for 12 months, but bear in mind that you won’t be able to make withdrawals without being penalised. Interest is also paid monthly, so you won’t benefit from compound interest. As a result, the actual interest you’ll earn is 5.84%.
And bear in mind that you can only save a maximum of £3,000 in this account over the 12-month period.
Elsewhere, Principality Building Society pays 5% AER on monthly deposits of between £20 and £500. You can save more in this account (up to £6,000 over the year), but make a withdrawal and your interest rate will drop significantly.
Finally, Abbey pays 4.5% on its monthly saver, or 4.13% if you make one withdrawal. You have to deposit between £20 and £250 each month for 12 months – miss a payment and your rate will drop to 0.1%.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
Regular savings accounts
The attraction of these accounts is the high interest rate they pay. They require customers to deposit money each month, without fail. They come with a number of restrictions, such as monthly deposit limits, no one-off lump sum deposits and restricted withdrawal facilities. Although they are marketed with impressive-looking rates, it’s important to remember that as your money builds up gradually, your overall return will be lower than if you’d deposited a lump sum.
An account opened with a clearing bank (few building societies offer current accounts) that provides the ability to draw cash (usually via a debit card) or cheques from the account. Some pay fairly minimal rates of interest if the account is in credit. Most current accounts insist your monthly income (salary or pension) is paid directly in each month and they offer a number of optional services – such as overdrafts and charge cards – which are negotiable but will incur fees.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.
Where APR is the rate charged for money borrowed, Annual equivalent rate is how interest is calculated on money saved. The AER takes into account the frequency the product pays interest and how that interest compounds. So, if two savings products pay the same rate of interest but one pays interest more frequently, that account compounds the interest more frequently and will have a higher AER.
This is effectively paying interest on interest. Interest is calculated not only on the initial sum borrowed (principal) or saved (see APR and AER) but also on the accumulated interest. The more frequently interest is added to the principal, the faster the principal grows and the higher the compound interest will be. Compound interest differs from “simple interest” in that simple interest is calculated solely as a percentage of the principal sum.