12th June 2014
Kara Gammell looks at the way in which savvy savers can beat the rates available on savings accounts.
Bank customers looking to boost their nest egg could earn nearly three times as much interest by opting for a current account instead of a traditional savings account.
While the best buy instant access savings account on the market pays just 1.65%, Nationwide Building Society’s FlexDirect account, for instance, pays 5% for the first 12 months, while TSB’s Classic Plus account pays 4.89% on the first £2,000 in your account. Those looking to put away a considerable lump sum should look to Santander’s 123 Account, which pays 3% on balances between £3,000 and £20,000.
And the earnings potential is not to be scoffed at either according to figures from Moneyfacts.co.uk, the statisticians. For example, if you put your savings pot of £1,500 into the Nationwide current account above, rather than the top-paying instant access savings account, you would earn an extra £50 annually.
The high interest offered on the new style current accounts may force a change in the savings market, says Sylvia Waycott, editor at Moneyfacts.co.uk.
“No one would have expected the current account to become the potential saviour of the savings market, but many credit-paying current accounts are not just matching instant access accounts, but they are offering rates better than some five-year bonds,” she says.
There has been a surge in the number of high-interest current accounts available over the last few years, and the latest addition to the market has brought the sector back to the foreground once again.
This week, Tesco Bank launched a new current account paying an interest rate of 3% on balances up to £3,000.
The current account offers Clubcard loyalty points on all debit card spending, however, the bank will charge £5 a month unless customers pay in £750 a month
The account can only be opened online and there are just three “trial” branches at shops, although money can be paid in and withdrawn at 300 Tesco, Tesco Extra and Tesco Metro stores across the UK.
The move comes just four weeks after Marks & Spencer launched its own free-to-use current account and means the supermarket giant now offers a complete range of banking and insurance products to six million customers.
While the Tesco offering is not the the highest paying account on the available, it comes in at fourth place on the best buy tables and is more generous than the 1.35% offered by the savings account from the bank.
“Tesco’s new current account is competitive and means they join the growing list of high interest paying current accounts which could be a great option for savers,” says Anna Bowes of SavingsChampion.co.uk.
Savings rates have never been lower. What’s more, recent figures from the Bank of England show the amount UK households have saved into cash Isas fell in April, at the fastest monthly rate since the accounts were introduced in 1999.
The reason for these falling rates is the recently withdrawn Funding for Lending Scheme (FLS) is eroding the value of savings.
The scheme, which was launched in July 2012 but was refocused earlier this year, aimed help provide cheaper loans and mortgages to both individuals and businesses. Banks and building societies have been given access to cheap money from the Bank of England on the condition that they then lend this on at competitive rates.
But while FLS has had the desired effect with mortgage and personal loan rates falling, savers are paying the price due to paltry interest rates as lenders became less reliant on attracting deposits.
“These new pseudo savings accounts have become the go-to accounts at time when getting a decent return on cash, certainly easy access cash, has been hard to come by,” says Ms Bowes.
So what is causing the increase in current account competition? Is this a case of “too good to be true”?
Industry experts agree that the driving force behind the explosion of competitive offers is the current account switch guarantee scheme that was rolled out in September 2013.
As the service makes it easier than ever to switch bank accounts, with the entire process being completed in seven days or less, the banks and building societies know they need to work harder in order to attract, and keep, their customers.
“It’s great to see people at last being offered some credible alternatives to the big banks,” says Jafar Hassan, personal finance expert at comparison website uSwitch.com.
“We wouldn’t be surprised to see more retailers follow in the footsteps of Tesco and M&S and use their brand image and large customer base to offer financial products that rival the traditional institutions.”
Register here for Neil Woodford updates and receive a free research report.