Should you move your savings into a current account?

12 February 2009

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.

Alliance & Leicester, for example, pays a fixed rate of 6% AER for 12 months of its Premier Direct Current Account. Abbey, meanwhile, pays 5.5% on its bank account, fixed for one year.

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%.

Add new comment