Demand is increasing for cash savings accounts as more people become fearful about investment markets. People are also worried about tough financial times ahead and are building up their emergency cash pots in case they need to dip into them in the future.
While it might not seem worthwhile to switch your cash account, it’s often easy to do and if you’re earning a very low interest rate or have a large amount of savings - or both - then it can really pay off.
For example, someone with £5,000 and earning just 0.1% interest will earn a measly £5 a year in interest. But if they move this to an account paying 1.5% they’ll make £75 a year in interest, for very little effort. Say someone has £50,000 the figures grow tenfold - so you go from earning £50 a year to £750 a year.
I want easy access
The sacrifice you make for being able to withdraw your money whenever you want is that you’ll usually get a lower interest rate. If you’re locking your money up, the bank will reward you with a higher rate. Sadly no easy access account currently pays more than the current 1.7% rate of inflation.
The top-paying truly easy access account is from Marcus by Goldman Sachs, which pays 1.3% on up to £250,000. Virgin Money pays slightly more at 1.31% but only allows two withdrawals a year, so is unlikely to be worth the minuscule increase in interest. Saga also offers an account paying 1.3%, and is actually run by Marcus just with the Saga branding on it.
If you want an account that you can open inside a branch or via post your best bet is likely to be NS&I’s income bonds, which pay the next highest interest rate, according to Moneyfacts, at 1.15% on sums between £500 and £1m. This rate is only valid to the end of April, when it falls to 0.7%.
I’m happy locking my money away for a while
If you’re willing to tie your cash up and don’t need immediate access to it, you can earn a bit more money. The trade-off is that you’re locking in that interest rate for however long you sign up for, meaning you believe interest rates aren’t going to rise during that time.
For a one-year fixed rate you can get 1.6% with BLME, where the accounts are run under Islamic finance rules so what you get is an expected rate of return rather than a guaranteed rate. This rate is also offered by Hampshire Trust Bank and Vanquis Bank.
For a two-year fixed account the rate jumps to 1.75% with BLME, or increases slightly to 1.65% with Hampshire Trust Bank. The 1.65% rate is also offered by United Trust Bank and Vanquis.
At three years, the top rate increases slightly to 1.8%, which is offered by Investec Bank, Vanquis Bank and United Trust Bank.
Once you jump to five years and beyond the rates increase ever so slightly, with the five-year bonds from Vanquis Bank and United Trust Bank paying 1.85%. At this point you’re tying up your money until 2025 and are assuming interest rates won’t rise in that time.
I want to save regularly
You can earn more interest if you put money away each month, albeit on smaller sums. Some of these accounts require a current account with the provider and also usually only offer the rate for 12 months, at which point you need to switch.
If you miss a monthly deposit with some providers you lose it and you can’t double up the following month - so consider setting up a direct debit or standing order.
The top rate is 2.75% from First Direct, which lets you put in between £25 and £300 a month but you need to have a current account with it or switch to one.
HSBC also pays 2.75% if you have a current account with it, but only on up to £250 a month, and M&S Bank offers the same.
If you don’t want to move your current account then Coventry Building Society pays 2.5% on up to £500 a month, while Virgin Money pays 2% on up to £250 saved a month.
The trade-off for the higher interest rates on offer is that your money doesn’t get that rate all year, only the first monthly deposit earns the interest for the full 12 months, while the final deposit only earns it for one month, which reduces the total interest you earn over the year.
For example, £250 a month deposited earning 2.75% a year earns you £45.07 in interest over the year, but if that same £3,000 total deposit earned 2.75% over the entire 12 months you’d earn £83.55 interest over the period.
The Financial Services Compensation Scheme is in place to protect your money should your bank or building society fail. It will cover up to £85,000 per person with each institution, or £170,000 if the money is in a joint account.
In certain cases you’ll be protected up to £1m for up to six months, if you’ve received a windfall, such as money from the sale of your house or from divorce or redundancy. Check what’s eligible here.
Some banks will have different brands but will still be counted as one institution by the FSCS, so check you’re not doubling up. You can check if you’re covered here.
