Regular Savers offered up to 6%
Regular savers are being offered up to 6% on their savings with First Direct and M&S Bank, but is this really the best rate you can get on the market?
The banks are very clever when it comes to marketing their products in the most appealing way, and there is no doubt that a 6% interest rate in the current climate is highly desirable. But when it comes to regular savings accounts, you need to look a little deeper than the headline rate to get the real picture.
For example, on both the First Direct and M&S Bank accounts you can put in a minimum of £25 per month, or a maximum of £300 or £250 per month respectively, and the rate is fixed at that level for 12 months. So over the year you could put a maximum of £3,600 into the First Direct Regular Saver Account, and £3,000 into the M&S Bank Monthly Saver.
However, you need to be aware of one thing when it comes to regular savings accounts with high fixed rates – the banks are not actually offering you that as an interest rate for the entire year on every penny you can pay in. Let us explain.
So, you put in your first deposit – let’s say you put the maximum of £300 into the First Direct Regular Saver – and you get 6% over the full 12 months on that money. Great. But the next month you put in the same amount, and because it is not going to be in there for a full year, you actually get 11 months at 6% rather than 12, and then 10 months at 6% for the third payment, and so on.
Ultimately, this means you would actually get an annual rate of 3.2%, and there can be other conditions too. For example, for this account you need to have a First Direct current account in place, and if after the first six months you are not putting at least £1,000 into that account, then you will face a monthly fee of £10.
Put that £60 of fees into the mix, and the interest you would earn from your regular saving would equate to just £55.96 – taking your actual interest rate down to 1.55% - not so impressive now, is it? This is also before any tax has been taken away, if you pay tax, so potentially you could lose 20%, 40%, or even up to 45% of this figure if you are an additional rate taxpayer.
Even the Nationwide Flexclusive Regular Saver offering 5% on minimum deposits of £1 up to £500 per month beats this if you end up paying fees, despite the headline rate being lower. Although you must also hold a ‘Flex’ current account to access this rate from Nationwide, there is no other condition attached. On the same basis – with the maximum £500 deposit – you would earn an effective rate of 2.68% on the entire amount you can pay in over the year, and you can put more money into the account, so you will get more cash in return.
However, if you really want top rates, then check out the High Interest Current Accounts. For example, the TSB Classic Plus Account pays 4.89% on up to £2,000 – but this is not for a fixed period or an introductory rate. You must pay in £500 per month to the account to qualify for the rate, and if you put in the full £2,000 on day one, assuming the rate remains the same, you would get the full 4.89% for the year, giving you an interest amount of £97.80 before tax.
If you do not have enough money to pay a lump sum into a current account, then a regular saver might still help you beat some of the other accounts available, but the key message is not to be seduced by a higher headline interest rate – because that is exactly what the banks are counting on.
If you don’t want to switch your current account here's a few of the best High Interest Paying Current Account rates: