Despite last week’s base rate rise, savings rates still lag behind and sadly this is unlikely to change in a hurry.
Judging by past behaviour most banks won’t pass on the full 0.25 per cent increase to interest-starved savers at all, despite jumping at the chance to bump up their mortgage rates.
According to figures from Moneyfacts.co.uk, even if high street banks do boost their rates by 0.25 per cent, few of their easy access accounts would pay enough to even match the 0.75 per cent base rate.
Grow your savings: High interest current accounts pay far higher rates than most savings accounts
Furthermore, there are only a handful of savings deals that currently offer real gains. In fact to beat inflation – at 2.4 per cent – savers need to commit their cash for five years.
Our top money-saving tip this week, therefore, is to ditch miserly rates on easy-access savings accounts and consider an interest-paying current account that will beat both the base rate and inflation.
The top high interest current account deals
The top deal on the market is Nationwide’s Flex Direct paying 5 per cent on up to £2,500. After a year the rate drops to 1 per cent, so you would need to move your cash again to continue to get inflation-beating returns.
The building society also has a FlexPlus account that pays a lower 3 per cent on £2,500, but the interest is ongoing. It won’t be worth opening simply for the interest on offer as the account has a £13 monthly fee, but it’s one of our favourite packaged bank accounts.
Tesco Bank pays 3 per cent on up to £3,000 – guaranteed until April next year. You need to have at least three direct debits per month set up and deposit £750 per month.
Another perk is that offers extra rewards for spending.
A feasible £400 per month spend on food shopping plus £500 spent elsewhere would clock up £102 in Clubcard points in a year.
These can be swapped for vouchers to spend elsewhere – worth up to three times more – or even swapped for BA Executive Avios. £102 is worth a whopping 24,480 in air miles.
It won’t beat inflation – but Santander’s 123 Account still outstrips easy-access saving rates at the moment and is the best option for savers with larger pots.
It pays 1.5 per cent on up to £20,000, plus you get up to 3 per cent cashback on household bills paid from the account. However it does come with a £5 monthly fee.
TSB does also offers a decent in credit interest rate at 5 per cent on first £1,500 for customers with its Classic Plus account. however, considering its catastrophic IT meltdown earlier this year it’s unlikely going to be enough to win over new customers.
Two clever trips to boost earnings
The most lucrative in credit interest accounts unfortunately limit the balance you are able to earn interest on, meaning only smaller pots benefit from the savings-beating rates.
There are a couple of clever ways round this however.
Most accounts allow you to open one personal account plus one joint account, this means a couple can hold three accounts between them.
Using the Tesco Bank account, for example, this means you could earn 3 per cent on up to £9,000. Nationwide has the same policy, so that’s £7,500 earning 5 per cent interest.
The accounts do make you jump through a few hoops though. You will have to ensure that you keep up the minimum deposit and direct debit requirements to keep earning interest.
If you want to really play the system, you can open multiple high interest accounts accounts with different banks.
If you max these out it is possible with careful planning to then cycle your earnings through each one every month to fulfill the minimum deposit requirements.
The best way to do this is to set up standing orders between your accounts.
What about a regular saver account?
Regular savings accounts also pay eye catching interest of up to 5 per cent.
Unfortunately the way these accounts work, allowing you to add a limited amount each month, mean you won’t benefit from the inflation-busting rates on the full lot until the final month.
However, they still offer savers higher returns than the average savings account.
Putting away £250 per month into an account paying 5 per cent would earn £81.25 in interest – equivalent to a rate of 2.7 per cent on the full £3,000 balance sat in an account for a year.
Remember though, most accounts won’t allow you to skip monthly deposits and you won’t be able to access your cash until the end of the term, or you forfeit your interest.
Customer service favourite, First Direct’s, Regular Saver, attached to its 1st Account, pays 5 per cent and allows deposits of up to £300 a month.
Nationwide also pays 5 per cent to customers on its Flex Regular Online Saver. It also allows savers to squirrel away up to £250 per month.
HSBC also pays 5 per cent and allows monthly deposits of up to £250. But you will have to be an Advance or Premier account holder to qualify. These accounts come with hefty balance requirements so they won’t be for everyone.
M&S Bank pays 5 per cent on savings which can be topped up by up to £250 a month. The account is reserved for existing customers but the current account could be worth moving banks for, as it pays £125 in vouchers when you sign up plus a £5-a-month top up for a year. It also offers a £100 interest-free overdraft.
Santander’s Regular Esaver offers 3 per cent on up to £200 a month and Lloyds offers the same rate on a larger £400 monthly balance. Alternatively TSB customers get 2 per cent on a £250 monthly deposit.
THIS IS MONEY’S MUST-READ GUIDES FOR THIS WEEK
THIS IS MONEY’S FIVE OF THE BEST CURRENT ACCOUNTS
Was the rate rise a wise move?
Some have been calling for a rate rise for a long time, while others believe we must try to get back towards normal before recession hits.
But those opposed believe even this tiny shift up to a very low base rate level of 0.75 per cent, is a gamble too far from the Bank of England.
On this podcast, Simon Lambert, Lee Boyce and Georgie Frost dive into the rate rise.
Why did the bank hike rates, who will it affect, why do interest rates even move up and down, and how did they end up at 0.5 per cent in the first place?
More crucially, how high will they go now and how fast?