A regular saver can pay much more than the miserable savings rates going for easy access and fixed rate accounts. But is the rate really as sweet as it seems?
When I tell people that until last week I was earning 8% on my savings, most assume I've invested in some obscure African oil stock or that I've put the decimal point in the wrong place.
Unfortunately my account matured and I'm now earning 6%, thanks to my regular savings account.
Regular savers, which involve savers depositing a certain amount each month for a fixed period, tend to offer the best rates of interest. But are they everything they're cracked up to be?
Firstly, you need to decide if this type of account is right for you. The giveaway is in the name – it's not for savers with a lump sum to tuck away. For the most part, regular savings accounts have a strict stipulation that you need to pay in a fixed rate each month, often via standing order, or the dazzling rate will be chopped to nearly zero.
Secondly, while 6% sounds like a brilliant rate to be earning while interest rates are so low – Moneyfacts data from earlier this month showed that the average one-year fixed rate bond is paying 1.67% – the amount of interest I'll eventually earn is not quite as straightforward as it may appear.
I save into a first direct Regular Saver Account each month, which now pays 6% AER after being slashed from an even-higher 8% earlier this year. To open this account, I have to bank with first direct, and pay in at least £1,000 each month to my current account. Likewise, HSBC – which owns first direct – pays 6% on its Regular Saver only to Premier, Advance and Advance Graduate current account customers, but 4% to the rest.
I can save between £25 and £300 a month for 12 months via a standing order, but if I close the account before the year is up, the interest rate slumps back down to a not-exactly-life-changing 0.05%.
The 6% rate also starts to look less juicy when tax is taken off. As the account is not in a tax-efficient ISA wrapper, once 20% tax is deducted I only earn 4.8%, though that's still significantly higher than any of the best rates on one-year fixed-rate bonds on the market, currently limping along at just under 2%.
But there's one major drawback that applies to all regular savings accounts: there's a cap to how much you can save in one month, typically hovering between the £250 to £500 mark. The accounts will accrue interest monthly, so after one month with the first direct Regular Saver Account, you'll earn 6% on the £300, then 6% on £600, and so on until the maximum investment of £3,600 is subscribed.
If you saved the maximum amount, after 12 months you'd have £117 in interest – or £93 after tax. A general rule of thumb with a regular saver is to halve the headline interest rate, and you'll get a better idea of the interest you'll actually earn.
Even when halved, the rate still stacks up favourably against other savings accounts, but against the rates that peer-to-peer lenders Zopa or RateSetter are paying (albeit with multiple caveats) it looks pretty measly.
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After first direct and HSBC, the next best deal at the moment is the 12 Month Fixed Rate Members' Regular Saver from Saffron Building Society, paying 4%. Unfortunately it's available to existing customers only, and is operated only by going into a branch, which is unhelpful if you don't live anywhere near Essex. The maximum monthly limit is £200, so you can only save up to £2,400 a year, although you are allowed unrestricted access to your cash.
The Kent Reliance Building Society has a One-Year Regular Savings Account, also paying 4%, and again only operated in branch. But it offers unlimited withdrawals and a maximum £6,000 annual investment, or £500 a month – higher than most others. In fact, the best rates are mostly in-branch accounts with regional building societies, until nearer the 3% mark there are some online and postal accounts that are more easily accessible.
For example the Cambridge Regular Savings Bond Issue 3 pays 3.05% and can be managed online, but the maximum investment over the year is only £3,000 and you can only make one partial withdrawal over the year without forfeiting the interest rate.
After that, there is the Leeds Building Society Regular Saver Issue 3 paying 3.05%, managed in-branch or by post. Norwich & Peterborough and Yorkshire Building Society also offer postal regular savings accounts with limited access to your cash paying 3% for a year. All three have a maximum monthly limit of £250.
Remember that once the initial year has ended, your money will be swept automatically into a bog-standard savings account, typically one that earns a rubbish rate of interest. So keep a note of your maturity date and open a new one.
I'm now on my third first direct Regular Saver Account, and have made around £150 in interest over the two years: not bad considering I don't even notice the money coming out each month.
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