By our guest writer, personal finance journalist, Emma Lunn
High interest savings accounts - have you read the terms and conditions?
Those looking for a decent return on their money may be tempted to turn to a handful of high interest current accounts offering rates of up to 5% Annual Equivalent Rate (AER). It may sound great but there could be a number of hoops to jump through to get the advertised rate.
TSB’s Classic Plus account advertises an AER of 5% for in-credit interest. However, this rate is only available on balances up to £2,000 – no interest at all is paid on amounts over £2,000. The account needs to be funded with £500 a month for the 5% rate to apply.
Nationwide’s Flex Direct account also offers interest of up to 5%. But the small print reveals this is only on balances up to £2,500 and the rate is only guaranteed for a year. Regular funding of £1,000 a month is required.
Tesco Bank pays 3% in-credit interest with no minimum funding requirement. The rate is available on balances up to £3,000.
Bank of Scotland Classic with Vantage advertises in-credit interest of up to 3% – but closer inspection of the account reveals the interest rate is tiered. Account holders are only paid 3% on balances between £3,000 and £5,000. 1.5% interest is paid from £1 to £999.99 and 2% between £1,000 and £3,000. You need to pay in £1,000 a month to get these rates.
Santander’s 123 Current Account pays 3% interest on balances between £3,000 and £20,000. But the rate comes with a number of provisos: Firstly, there is a £2 monthly fee which will rise to £5 in January – this will eat into your returns but can be offset by cashback paid on household bills. Secondly, you must fund the account with £500 a month; and thirdly, you must set up two direct debits, such as bills, to come out of the account. That’s a lot of hoops to jump through to get a mere 3% interest.
Admittedly, with some planning and organisation it’s possible to make high interest current accounts work for you. For example, if you had £12,500 capital you could deposit £2,000 in TSB’s Classic Plus account (5%), £2,500 in Nationwide’s Flex Direct account (5%), £3,000 in Tesco Bank (3%) and £5,000 with Bank of Scotland (3%). Then you would need an extra £1,000 to move between TSB, Nationwide, and Bank of Scotland in the space of a month to ensure you continue to get the high rates.
It’s doable – but takes a lot of work.
It’s a similar story in the savings market – any rates that initially appear attractive can come with onerous strings attached. For example, First Direct’s Regular Saver account pays 6% AER but deposits are limited to £300 a month for 12 months. You also need to be a First Direct current account customer to be eligible for the savings account.
Elsewhere in the savings market you need to tie up your money to get a decent return. Savers can earn interest of over 3% with several accounts – but only if they are prepared to save their money in a fixed rate bond for five years or more.
For example, Agri Bank has a five year fixed rate account paying 3.15% AER. Another proviso of this account is that savers must deposit at least £5,000.
Savers only willing to commit to a one-year bond can get a maximum rate of 2.15% AER with Shawbrook Bank or 2.10% with Charter Savings Bank. Savers needing instant access to their cash can get a maximum rate of 1.65% AER with RCI Bank.
With all these hoops to jump through to get less-than-impressive rates, isn’t it time you looked for an alternative home for your money?
Click here to compare high interest savings rates with the new IFISA or Personal Savings Allowance
Source for data cited: All accounts used as examples were sourced at www.moneysupermarket.com, 10 December 2015