Regular savings accounts: is 6% worth it?
Regular savings accounts, as the name suggests, require account holders to put away a lump sum each and every month.
In return, they often offer high interest rates - 3%, 4% and even 6% - much more than the best standard savings and cash ISAs - and better than the simplest P2P accounts.
The catch: you're starting from zero
Of course, there's a catch.
Interest rates for regular savings accounts range from between 2% and 6% AER (annual effective rate).
However, the high rates of interest are constrained, in practice, because regular savings accounts make holders start from zero.
Savers must put away a set amount every month, with the minimum regular deposit typically being between £1 and £25, and the maximum ranging from £100 to £500.
Some accounts allow us to increase the amount we put aside each month; others only allow us to put more in one month if we don't manage to put in our usual sum the previous month.
The clue is in the name really - we put aside a regular amount on a regular basis.
Interest is calculated and applied monthly.
This is important. The problem for many people comes because they think they're going to get interest calculated on the final balance at the end of the savings term.
Take, for example, those with an account offering 6% AER and a final balance of £10,000 at the end of the year. They might expect to get £600.
But as the interest is calculated on the balance at the end of each month, those savers will receive 6% AER every month on what they've managed to save so far.
The trick to calculating what we'll actually earn over the term is to work out what we'll have in the account at the end of it, then calculate interest of half the quoted rate.
Is it worth it?
Even taking that into consideration, regular savings accounts can offer some of the highest returns on stowed away cash.
|Account||Invested||Interest after a year|
|6% regular saver||£300 each month
|5% regular saver||£300 each month||£90|
|2% cash ISA||£3,600||£72|
|3% regular saver||£300 each month||£54|
Regular savings accounts also perform an important psychological function: savers have to put away money every month. No matter the interest earned, that's valuable.
While they've disappeared somewhat now, it's still the case that some account providers offer extra incentives to get people to save in this way. Previous perks have included cash bonuses for those able to deposit more than a certain amount each month.
Others have offered switching bonuses - and the incentive still offered by at least one provider at the time of this update is the rather more feeble offer of entry into a prize draw.
That said, one of the biggest disincentives for saving in this way has recently been dealt a blow.
Thanks to the introduction of the Personal Savings Allowance, many of us can now 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, as ever, exempt); higher rate taxpayers can earn up to £500.
We've more on how the PSA works, and how much it's possible to save in accounts with a variety of rates, in our guide to the new allowance here.
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.
Furthermore, the regularity required means we can build up a small but significant sum to invest in an ISA - new or existing - next year.
There's more on making the most out of our savings using different types of account in our dedicated guide here.
The other deterrent is that of the hassle involved. This is much less easily overcome: regular accounts have a lot of restrictions and there's no way of getting around them - save not taking out a regular savings account.
In this case, traditional "lump sum" savings accounts - and the current crop of high-interest current accounts - may well be worth looking at.
Those that can cope with a little hassle for more interest should read on.
How to use them
Here are four steps to using regular savings accounts.
1. Check loyalty requirements
Banks use the spectacular interest rates they can offer with their regular savings accounts as a way to attract new customers. To enjoy 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.
Ideally we're 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 direct debit 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 - which at present can be as low as 0.1%.
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.