The art of saving is pretty straightforward, but to maximise your cash’s growth, you need to carefully choose your savings provider.
Millions of savers could be missing out on the best savings rates and losing out on growing their money, with a study by TotallyMoney finding one in three (37%) people haven’t switched accounts for five years, and 27% have never switched.
Research by Paragon Bank’s Spring found in May that 55% of the UK population have a combined total of £526 billion languishing in zero or low interest paying current and savings accounts.
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How does an easy-access savings account work?
An easy-access savings account does what it says on the tin – it gives you flexibility with your cash. Traditional easy-access savers allow you to access your savings whenever you like and give you freedom on withdrawals.
The interest rate you earn is applied to the total in the account, though it is variable, which means it can change at any time depending on market movement.
For the last year, the Bank of England has been lowering interest rates, and many savings rates have also fallen as a result. In its latest meeting, the central bank cut rates to 4%.
Easy access savings accounts can be great places to save money for a rainy day or to keep your emergency fund as you can earn interest on your balance but access the money at short notice.
That said, lenders are imposing more and more hidden restrictions on easy-access accounts despite a high headline rate that’s designed to lure you in.
Haine told MoneyWeek: “Read the small print carefully because some of the best easy-access deals might not be as easy-access as you think. There can be restrictions such as a limited number of withdrawals with a reduced savings rate applied for those that breach that limit.
“Other catches to beware of include accounts that offer a bonus rate, which applies for a limited period such as six or 12 months, before the interest paid drops substantially. There may also be eligibility requirements to secure a top rate, such as a saver opening a current account with the same bank.”
How does a regular savings account work?
Regular savings accounts typically pay a more attractive rate of interest than those offered by easy-access savings accounts – for example, the best regular savings account on the market at the moment pays 7.5% interest.
Plus, unlike easy-access rates, those on a regular saver tend to be fixed, giving you certainty on the interest you earn.
However, they are less flexible than easy-access accounts as they often come with caveats.
The most common feature of a regular saver is it will set a minimum payment you must pay into the account each month. There are also limits on how much you are allowed to pay in and withdrawals are normally restricted or not allowed at all (without forfeiting the interest).
A lot of regular savers also require you to be an existing customer of the bank, but that’s not the case with all accounts.
Haine told MoneyWeek: “For those with a fixed sum to save from their income every month, regular saving accounts can offer the highest rates on the market, such as up to 7.5% – though these typically only last a year with the interest paid out at the end of the term.
“The competitive savings rate often means the saver must abide by set terms and conditions, such as a cap on the amount that can be saved in the account, an agreed deposit each month and a limited number of withdrawals.”
It’s important to understand that the way the interest is applied with regular savings accounts doesn’t mean that you would get the full advertised rate on each deposit.
The advertised rate only applies on savings deposited for the full year. So if you were paying in £50 a month, the first £50 will have been saved for 12 months and earn the full percentage. The second £50 saved will only be in the account for 11 months. So you’ll earn eleven month’s worth of the quoted rate on that £50. The next £50 will be ten month’s worth, and so on.
Regular savings accounts can “work better for people that want to get into the habit of regular saving, but are less effective for those that want to save a lump sum or make regular withdrawals,” says Haine.
She added that consumers should be aware of the terms of their accounts as “some accounts allow access to the money but the interest rate may be reduced if you do make a withdrawal or if you don’t save into the account every month.”
Easy-access versus regular savings accounts
Top paying regular savers today can reach well above 7%. Principality Building Society currently has a six-month regular saver that pays as high as 7.5% with a maximum investment of £200 a month.
However, the way the interest is applied with regular savings accounts doesn’t mean that you would get the advertised interest rate on each deposit.
As we have explained, this rate only applies on savings deposited for the full year.
Using the example of an account that has an advertised interest rate of 7.5%, we can see that after 12 months of a £300 investment, you would pay in £3,600 and earn £146.23 in interest.
Assuming that you have a lump sum of £3,600 to save, here’s how much interest you would earn if you drip-fed your cash monthly into a regular savings account.
The interest is worked out based on the monthly balance, then paid annually.
The table below illustrates how the interest on £300 monthly deposits is determined, based on a regular savings account paying 7.5%.
Monthly payment | Months invested for | Interest (top regular savings rate 7.5%) |
|---|---|---|
£300 | 12 | £22.50 |
£300 | 11 | £20.62 |
£300 | 10 | £18.75 |
£300 | 9 | £16.87 |
£300 | 8 | £15 |
£300 | 7 | £13.12 |
£300 | 6 | £11.25 |
£300 | 5 | £9.37 |
£300 | 4 | £7.50 |
£300 | 3 | £5.63 |
£300 | 2 | £3.75 |
£300 | 1 | £1.87 |
| Row 12 - Cell 0 | Total | £146.23 |
While the top-paying easy-access savings accounts may have less attractive rates than those offered by the top regular saver account providers on the surface, you may end up better off despite the lower advertised rate.
Using the example of Chase’s Saver with boosted rate, which currently pays 5% for the first year, we can see this in action.
If you deposited a lump sum of £3,600 in this account you would earn interest of £180 over the course of 12 months, £43.50 more than if you drip fed it into a regular saver that pays interest of 7%.
The top easy-access savings rate on the market at the moment is 5%, while the market-wide average is 2.64%, according to Moneyfacts.
Deposit | Interest earned after one year (top easy-access rate 5%) | Interest earned after one year (average savings rate 2.64%) |
|---|---|---|
£1,200 (lump sum deposit on day one) | £60 | £31.68 |
£3,600 (lump sum deposit on day one) | £180 | £95.04 |
Is my money better off in an easy-access savings account or regular savings?
You ideally need to weigh up the rate offered on each account, the amount you have to save and if you might need to access your money any time soon.
If you already have a lump sum, you could pay it into an easy-access account and drip feed the maximum into a regular saver so you get the best of both worlds.
If you intend to save monthly on payday, perhaps, it comes down to the rate available and whether you need access to the money.
While the numbers using our examples above suggest you’d be better off with an easy-access account with a lump sum, it’s worth remembering that there is no guarantee that the headline rate will stay the same on an easy-access account, as it’s a variable rate.
On the other hand, some regular savings accounts offer a fixed rate for 12 months, which at least gives you certainty on what you will earn.
Our average savings by age article explores how much money different groups of people have put aside.
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