If you’re scrolling through the best savings accounts on the market, chances are the ones with the highest interest rates are regular savings accounts.
For example, First Direct and the Co-operative Bank currently boast 7% regular savings accounts. Several banks and building societies also offer versions with interest rates of 6% or more.
These rates are much higher than those on offer from easy-access accounts and fixed-rate bonds; the top deals pay less than 5%.
So, what’s the catch? Looking purely at the headline interest rate, a regular saver account seems like a no-brainer. Savers could be forgiven for thinking it’ll turbo-charge savings much faster than it would in an account paying a lower rate.
However, there is a pretty big catch. Regular savings accounts usually restrict the amount you can contribute each month, and you can’t start off by saving a large lump sum.
This means the advertised interest rate is only paid on the money in the account during the first month.
Say you save £200 a month in the 7% First Direct account. Yes, you’ll earn 7% interest on the first monthly deposit of £200. But you won’t get 7% on the £2,400 you save in total across the year. What you earn overall is just over half of the headline rate.
Sarah Coles, head of personal finance at Hargreaves Lansdown, tells MoneyWeek: “The headline rate on a regular saver looks great, but bear in mind the impact of drip-feeding the money in.
“The accounts tend to last for a year, and while the first £200 will be invested for the first year, the last one will only be in there for a month. It means you’re effectively getting half the advertised rate on average.”
How the interest rate works on a regular savings account
Let’s take a closer look at how much interest you’ll earn on a regular savings account.
Note that the top regular savings account currently pays 7.5%, from Principality Building Society, but it only runs for six months, rather than the more typical 12, and you can only pay in up to £200 a month. Check out Best regular savings accounts for all the latest deals.
So, let’s use the more conventional First Direct 7% regular saver – which allows up to £300 to be saved each month, and runs for a year – for our example. (Co-op’s regular saver also pays 7%, with a monthly maximum of £250.)
If you save £300 a month into the First Direct account, this gives a total of £3,600 over the year.
Many savers will expect to earn 7% interest on the full £3,600 that is eventually deposited into the account. If that was the case, you’d receive £252 interest at the end of the year.
However, the advertised rate only applies to the cash that is saved for a whole year, in other words, what you save in the first month.
So, the first £300 will have been saved for 12 months and earn the full 7%. The second £300 saved will only be in the account for 11 months. So you’ll earn eleven twelfths of 7% on £300. The next £300 will be ten twelfths, and so on.
According to Moneyfacts, a regular saver paying 7% with £300 deposited each month would actually generate £139.46 in interest. This is equivalent to an interest rate of 3.87%.
If you want to see more examples of how much interest a regular savings account pays, have a look at Moneyfacts’ monthly deposit calculator.
How do regular savings accounts compare to other types of savings accounts?
Given there are restrictions on how much you can pay into a regular savings account each month, and that the overall interest rate is a lot lower than the headline rate, is this sort of account the best deal for you?
Let’s say you want to save £3,600. Should you drip-feed this into a regular saver, or stick the whole lot in an easy-access account or one-year fixed bond? Let’s compare the First Direct account against the top-paying one-year bond and easy-access account.
Swipe to scroll horizontally
Account
Interest rate
Interest earned on £3,600
First Direct Regular Saver
7%
£139.46
Atom Bank easy-access
4.65%
£167.40
Cynergy Bank one-year fixed bond
4.65%
£167.40
Source: Moneyfacts
As you can see from the table, the best easy-access account and one-year fixed-rate bonds both pay 4.65%, which works out as £167.40 interest on a £3,600 deposit.
In contrast, First Direct pays a lower amount of £139.46, despite a higher interest rate of 7%.
If you don’t want to lock your money up for a year and want the option to make withdrawals, the Atom Bank easy-access account looks like the best option.
If you don’t need access to your money and want the security of the interest rate staying the same – and Bank of England base rate is predicted to fall this year, which could lead to savings providers cutting their rates – the one-year fixed-rate bond could be a better choice.
Coles points out that if you are building your savings, and don’t have a lump sum to save at the start, a regular saver “may be the most effective approach, but if you already have a lump sum, the fact you can only put in a limited amount each month [with a regular saver] means you can do better elsewhere”.
Is a regular savings account the right choice for you?
According to Rachel Springall, finance expert at Moneyfactscompare.co.uk, regular savings accounts are ideal for slowly building a pot as they instill the savings habit.
However, she adds: “Consumers will need to work out if they are the right choice for them as some can be restrictive and might not be suitable for larger deposits. Regular savings accounts can also revert to a flexible account after the term ends, which might not pay a good rate, so savers must make a diary note to reinvest if they are still building funds towards their future goal.”
Springall notes that a fixed-rate bond is a good choice for someone who has a reasonable lump sum to invest, if they want a guaranteed return and do not want the temptation of using the pot over the short term.
“Those who change their mind can get their money back if it’s within the cancellation agreement of any bond, so it's wise to be aware of any terms and conditions before investing.”
In contrast, an easy-access account may be a better alternative if someone needs flexibility with their deposits. Springall adds: “However, some providers may put a limit on the amount someone can withdraw during the year, and others can carry a rate bonus. Comparing deals carefully and making a calendar note of any bonus is essential to not be left disappointed.”
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Ruth is an award-winning financial journalist with more than 15 years' experience of working on national newspapers, websites and specialist magazines.
She is passionate about helping people feel more confident about their finances. She was previously editor of Times Money Mentor, and prior to that was deputy Money editor at The Sunday Times.
A multi-award winning journalist, Ruth started her career on a pensions magazine at the FT Group, and has also worked at Money Observer and Money Advice Service.
Outside of work, she is a mum to two young children, while also serving as a magistrate and an NHS volunteer.
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