Savers: beware headline-grabbing interest rates
What at first glance may seem like a generous interest rate on a savings account may get watered down by the various strings attached.
In this era of horribly low interest rates for savers, it's tempting to jump on anything that looks like a decent deal. Here's one.
First Direct is offering savers an eye-popping rate of 6% on its Regular Saver account. That's pretty attractive when the typical rate on an easy access account is more like 2% and even the best tax-free cash individual savings account (Isa) pays around 2.5% (currently from Cheshire Building Society). So should savers rush to take this First Direct deal?
It's a good deal but be aware that there are a few catches. Firstly, as the name Regular Saver' suggests, this is not an account that you can dump a rainy-day lump sum in and leave it to rack up 6% a year interest.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Instead you pay in an amount on a monthly basis that can be as little as £25, but no more than £300. So the most you can stash away here in a single year is £3,600. And that really impacts on the interest rate you earn.
Since you are only getting the benefit of the 6% rate on the first £300 for a full 12 months, the maximum value of the pot after a year will be limited to £3,717 (including interest), or £3,693 once that interest has been taxed at 20%. So your effective post-tax rate of interest is more like 2.6%, as Ed Monk points out on thisismoney.co.uk.
That's still not a bad rate but it's close to the Isa rate mentioned above (note that this First Direct Account isn't Isa-eligible). There are one or two other conditions attached too, the main one being that this 6% account is only available to the bank's current account customers.
To avoid an account fee of £10 a month on this account, you need to pay in at least £1,500 a month, or maintain a balance of that amount, or already hold another First Direct product from a limited list.
That said, we'd still be tempted by this offer if you've already used up your cash Isa allowance. Why? Well, although you are not getting an inflation-beating return (inflation stands at 2.7%, judged by the consumer prices index) a rate of 2.6% nonetheless compares well to other offers on the market. And while switching current account providers can be a hassle, with First Direct, the effort may prove worthwhile as the bank regularly tops tables for customer service and satisfaction. First Direct customers also get a £100 signing-on incentive.
That probably creates enough reasons to move your current account to First Direct anyway - the table-topping savings rate is really just a bonus.
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
-
8 of the best houses for sale with libraries
This week: the best houses for sale with libraries – from a five-storey Georgian townhouse in Bloomsbury, London, to a 15th-century property with a library in a medieval tower in Lozère, France
By Natasha Langan Published
-
Investors pull money from UK equities as government warns of “painful” Budget
The government’s post-election honeymoon period has been short-lived, and investors are shying away from UK equities as a result
By Katie Williams Published