Savers attracted by the high interest rates that banks offer on regular savings accounts may be disappointed, as returns may be lower than expected and many transactions come with strings attached.
These accounts offer supercharged interest rates of up to 7% – but the way returns are calculated means many savers won’t get as much as they thought.
Research from This is Money reveals that in terms of cash flow, a single regular saver deal offers savers better annual returns than the best easy-access account, which pays less than half that overall rate – 3.4 %.
Choosing the second-best regular saver account, which has an all-in rate of 6.25%, would make the client’s situation even worse.
Conservative consideration: when it comes to overall savings rates, bigger isn’t always better when it comes to the pounds in savers’ pockets at the end of the year
How do regular savers work?
Regular savings accounts, as the name suggests, encourage people to set aside a fixed amount each month. Interest is normally paid after one year.
Niche savings offers are in the spotlight because of their consequential role on high street bank savings rates.
Banks have come under fire from MPs for failing to pass on Bank of England base rate increases to their easy access accounts – the most popular type of savings deal in the country.
In response, UK bosses from Barclays, HSBC, NatWest Group and Lloyds Banking Group all argued that savers didn’t really want better easy-access account rates.
Instead, bank chief executives argued, savers wanted to be encouraged to save with better regular savings offers.
How is interest calculated on a regular saver?
There are several conditions attached to regular savings offers that can easily trip up unwary consumers.
The first is that the way interest rates are calculated on regular savers offers can trip up savers and mean they earn a lot less than they think.
Let’s take First Direct’s Best Regular Savings Rate as an example. This offer pays 7% and saves you up to £3,600 per year.
Seven per cent of £3,600 is £252, but the First Direct deal doesn’t pay that amount. Instead, it only pays a maximum of £136.50 a year.
The reason for this is that you only earn a fraction of this overall rate per month, each time you top up the regular saver.
Only the last month will you get the full 7% interest.
Banks must state this in their terms and conditions, but many savers are unaware of this.
The offers are useful because they help to encourage a savings habit among consumers. They have traditionally been aimed at groups who needed help saving for one big event a year – normally Christmas.
Most regular savers also limit the amount you can save, with the major banks currently setting limits between £150 and £400 per month.
Regular savers usually don’t allow withdrawals – and may even close if you try to withdraw money. And getting a regular saver also means opening a current account with the bank that offers it.
Slow and steady: regular savers encourage customers to deposit a similar amount into their account each month
Anna Bowes, founder of financial experts Savings Champion, said: “There are a lot of strings attached to these accounts. Savers have a responsibility to understand what they are subscribing to, but sometimes it is not easy and not everyone has the ability to understand them in the same way.
“Headline rates on regular savings offers are often amazing. I have no objection to regular savings accounts at all, because if you can only save a little and often, they may offer you the best rates.
‘But to simplify the math, someone who made a deal with an all-in rate of 7%, saving £100 a month, wouldn’t be earning £84 a year in interest. They would get about half of that, because just one of those monthly deposits earns the full interest rate.
Are regular savings rates better than easy access accounts?
At first glance, rates for regular savers seem unbeatable, with many paying interest in the range of 4-7% per year.
But a single regular saver deal earns enough interest to beat the returns possible on the best easy-to-access account.
To show this, we looked at how much a saver could earn by maxing out each of the five best regular saver offers, then compared that to the interest they could get by putting the same amount into the best easy access offer without touch it.
The best easy access account, from Chip, pays 3.4% per annum, and we’ve found that only First Direct’s regular saver beats it when it comes to interest.
Direct premiere
First Direct leads the pack with regular interest rates for savers. The digital bank, owned by HSBC, has a regular savings account that pays 7% a year on up to £300 a month, or £3,600 over 12 months.
A saver putting in the maximum possible would earn £136.50 in interest with this regular saver, compared to £122.40 using the Easy Access Chip account.
A spokesperson for HSBC UK said: “We give customers access to a wide range of savings products which cover different savers’ needs, some of which offer a return above the base rate, including our regular saver 5% with HSBC and 7% with Première Directe.
“Although our savings accounts are not linked to the base rate, we have increased interest rates on savings accounts eight times in the last year, and each savings product has seen its interest rates increase several times over this period, helping clients start a positive saving habit and save for longer term goals.
Lloyd’s
Lloyds’ best regular saver is its Club Lloyds Monthly Saver, which pays 6.25% a year. Savers investing the maximum of £400 per month would earn £150 after 12 months.
However, someone putting the same total of £4,800 into the easy access chip deal would earn £163.20.
The Club Lloyds Monthly Saver offer is only available to customers who have a Club Lloyds current account. This has a charge of £3 per month, although this is waived if you pay £1,500 per month or more into the current account – rising to £2,000 per month from April 1.
NatWest/RBS
These sister banks both have an identical offer – the Digital Regular Saver. This earns 6.17% interest on balances up to £5,000 and 0.65% on any amount over that.
The agreement does not expire after a year, unlike many other regular savers, and it allows customers to withdraw money at any time.
However, consumers can only save £150 per month, or £1,800 per year, under the deal.
This means that the maximum a saver can earn per year in interest is £59.83.
Consumers could get a little more (£61.20) in the best easy-to-access deal.
A NatWest spokesperson said: “We have focused on helping our customers develop a savings habit and since 2020 we have helped 1.7million customers save £100 or more for the first time.”
Halifax
The Halifax Regular Saver pays 4.5% interest on up to £250 per month, or £3,000 per year. After that time, a maximum contributing saver would have earned £67.50 in interest.
Putting the same amount into the Chip deal would earn £102 in savings.
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