Regular savings accounts

The interest rate on a regular saver is usually fixed for 12 months, and customers can be penalised for withdrawing early or missing payments.

Regular savers are great ways of putting away small amounts of money each month, although they are often capped at around £250 in deposits each month.

These types of savings accounts start from zero, so customers cannot start with a large balance and gain interest on that.

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What are regular savers?

Regular savers are savings accounts that require a customer to deposit a certain amount into the account each month.

These accounts often have higher interest rates than we see on easy-access accounts because banks know there is going to be a minimum amount going into that account over the length of the regular saver term.

There are a few important things to know about regular savers:

• The balance starts from zero, so there's no option to transfer a lump sum into it at the beginning to make the most of the interest rate
• Withdrawals are usually limited or strictly controlled
• Many accounts are strict about sticking to a minimum deposit each month and failing to do so could lead to the accumulated interest being lost or the account being closed
• Good saving rates on regular savers will only last for a fixed term and may become uncompetitive after that period
• Customers will usually need to be an existing current account customer with that bank

Another key thing to remember when considering whether a regular saver is worthwhile is the fact that interest is calculated on a monthly basis.

What this means for savers is that the headline rate on the savings account will end up being around double the actual rate received over the term.

Different regular savers will have different minimum and maximum deposits. To illustrate, here are a couple of options from major UK banks:

These examples demonstrate the differences between regular savers offered by major financial providers, and each has their own eligibility criteria and key facts to pay attention to.

For example:

• HSBC's regular saver doesn't allow partial withdrawals and the product matures at the end of the 12-month term, so the money will need to either be moved to a new regular saver or transferred elsewhere
• NatWest's regular saver doesn't have a time limit although the best interest rate only applies to balances up to £1,000, so it makes sense to keep money above that in a savings account paying more interest
• Santander's regular saver is only available to customers with current accounts part of the 1|2|3 World, Santander Select or Private Banking ranges

So, it's important to check the terms and conditions of regular savers to see what a bank's requirements are and how much will be made in interest during the term.

Tax on regular savers

Thanks to the introduction of the Personal Savings Allowance (PSA), many of us can save without being taxed on any of the interest we earn - although the risk does still exist.

In any one financial year, basic rate taxpayers can earn up to £1,000 in interest across all their taxable accounts (anything saved in an ISA is exempt); higher rate taxpayers can earn up to £500.

For those of us starting from scratch, a regular savings account is now just as good as saving using a tax-free account such as a cash ISA, especially considering the minimum deposit requirements can be much lower in a regular saver than an ISA.

Furthermore, the regularity required means we can build up a small but significant sum to invest in an ISA - new or existing - next year.

Learn more about making the most of your savings.

Are regular savers worth it?

Regular savers used to be one way of getting great interest rates on savings, but some of the returns are now dwarfed by other accounts such as cash ISAs and fixed-rate savings accounts.

There are a couple of notable drawbacks to regular savers:

• Interest rates mean the money doesn't grow as much as it could
• They start from scratch at zero
• Moving the money elsewhere at the end of the term can be a hassle

However, part of the problem seems to be that interest rates on saving accounts are low anyway, meaning savers aren't seeing their money grow as much as they did in the past.

If we look at HSBC's regular saver alongside some of their other savings options, we can see how it compares:

Bearing in mind that the actual interest rate is roughly around half of the advertised AER on a regular saver, it's roughly in line with HSBC's other high saving rates - and the amount of money that can be put into the account is limited.

That said, there are terms and conditions on all the accounts mentioned above, such as the fact that the ISA requires a minimum deposit of £2,000.

Yet, even in this context, the regular saver will suit some customers who simply want a savings account to add money to every month.

In fact, that is often touted as the one of the major benefits of regular savers - they ensure that a saver is putting a minimum amount away each month and that getting hold of it quickly is difficult (and might mean losing any interest gained).

So, while regular savers don't come with headline-grabbing interest rates, they fulfil the psychological function of helping us to put money aside. For some people, that may be even more important.

Customers who don't want a savings account yet might want to compare interest paying current accounts and pay attention to providers who allow customers to save alongside their main account like TSB, for example.

How to use regular savers

Like all financial products, working out how best to use regular savers and how they fit into an overarching financial strategy can help us figure out if they're worthwhile.

This process can also help us choose the right regular saver for us and whether it's worth the effort.

1. Check loyalty requirements

Banks use the interest rates they can offer with their regular savings accounts as a way to attract new customers. Enjoying the best rates available often relies on having a current account with the same bank.

Sometimes this isn't a problem - at least one of the best paying regular savers is offered by a provider with an equally attractive current account.

It's not always about the interest rates though.

We're ideally looking for a combination of a good regular saver with a current account that best suits our everyday banking needs - and for some of us that'll be in the form of free or cheap overdraft facilities or returns that can offset any fees we may need to pay.

Otherwise, we're likely to find that the current account that gains us access to the high interest regular saver could very quickly offset any potential benefits.

In this case, savers are better off applying for a regular savings account that doesn't require a pre-existing current account.

2. Don't miss payments

Missing a monthly payment can have painful consequences.

The account can be automatically closed or the interest rate dropped altogether. Other regular savings accounts punish missed payments by limiting the overall amount that can be saved.

Some accounts aren't quite this punitive - but it's best to set up a standing order from our current account to the regular saver as close to our monthly payday as possible in order not to take the risk of missing a deposit.

3. Don't make withdrawals

Withdrawals from the highest interest regular savings accounts are often severely punished.

Among those that do allow us to take out some of our money, it's common that we'll be limited to one or two withdrawals at most during the term of the account.

Failure to stick to this condition will again result in either the account being closed or the interest rate being dropped to that of the provider's standard easy-access account.

4. Switch when the rate changes

The advertised interest rate for a regular savings account is usually for a fixed term only - usually one year from opening. After this date, the interest on the account will revert to a more regular rate.

In some cases, the whole account will be converted to a different, less profitable, savings account.

Check the date when this will happen, set a reminder, and as soon after this point as possible, it's time to up sticks and move on to the next account.

Summary: Useful savings tool

Although regular savers are not as popular now as they used to be, they can still be a crucial part of a savings strategy for customers, especially if simply getting money from a current account into a separate place is on the agenda.

There are a few things to remember about regular savers:

• The interest rates are often better than some other savings products, but the headline rate is around double the actual rate that will be received
• Banks will have minimum and maximum deposits on their regular savings accounts
• Many regular savers have time limits after which the money needs to be moved into another regular saver or transferred into a normal account
• Banks often require us to be current account customers to be able to access a regular saver with them

Ultimately, interest rates on regular savers are decent enough, but they aren't going to net any spectacular returns for customers.

For some, though, that isn't the point of a regular saver. Anyone who wants to make a habit of moving money into a savings account each month could benefit from setting up a regular saver - and at least it will deliver a lump sum back at the end of the term.