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.

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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

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.