Savers are always encouraged to get the highest possible interest rates they can, after all, there is little point in holding your money in a savings account paying less than you can get elsewhere, unless you have already reached the £85,000 limit covered by the Financial Services Compensation Scheme (FSCS) with that provider.
However, there are times when you cannot look at the interest rate alone because the headline rate is not always what it appears to be and regular savings products are a classic example of this.
As the name suggests, a regular savings account requires you to commit to putting aside a regular amount of money each month. In return for this regular payment to your savings provider each month, the rates on offer typically look significantly better than those available elsewhere.
For example, Nationwide, First Direct, M&S and Santander are all offering regular saving accounts paying 5% AER, however these headline grabbing rates aren’t all they seem.
Let’s take Nationwide’s offering. You can put up to £500 a month in the Nationwide Flexclusive Regular Saver, which means over the year you can save up to £6,000 in this account. At this stage, you might be thinking that means bagging £300 in interest over the year, after all you are getting 5% AER. But, if this is what you are thinking, you will be very disappointed.
You only have £6,000 in the account for the last month; it took a year to build up to that amount. You only earn interest on money in the account. So, after the first month you would earn the 5% on just £500, half way through the year you would earn it on £3,000 and so on.
Over the year, your average balance would roughly be half the £6,000, in other words £3,250... so you should expect to earn around 5% of £3,250 over the year, which is approximately £162.50.
In real terms on this Nationwide account, you would receive £162.50, substantially less than you might have expected but still a good return in today’s market.
So, in summary we are not saying you should avoid these accounts, but just be aware that headline rates can be misleading. These accounts can be ideal for people saving towards a short-term goal like a holiday or wedding, for example and they will also help you get into the habit of saving regularly.
As with any savings strategy, you need to be aware of what is out there so you can get the best possible returns, use a mix of accounts, especially if you have more than £85,000 to deposit and keep your money on the move when your deal ends.
Savings Champion monitor the whole of the savings market so please call us on 0800 321 3581 to get more information on the best type of savings account for you.