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Earn 5% on your savings in a current account
Clydesdale and Yorkshire Banks have launched a new current account which pays out 4% interest on in-credit balances, joining several other accounts that pay better rates than the top savings products.
The Current Account Direct is targeted at customers who don't need to use a branch very often and is designed to be managed online and/or on the phone.
As it pays in-credit interest customers can not only benefit from earning 4% on their money, they’ll also have instant access to this cash. Given that the best instant access savings account on the market pays out around 1.70%, this is an appealing offer.
But the 4% is only temporary as after 31st March 2015 it’ll revert back to 2%. Although this is quite a drop, it’s still higher than all instant-access accounts, let alone other current accounts, which pay an average rate of around 1%.
To benefit from the 4% interest rate you’ll need to deposit at least £1,000 a month into the account.
The other accounts offering decent levels of in-credit interest come from Santander, Nationwide, Lloyds Bank and TSB. And there's nothing to stop you spreading your savings across a few banks to maximise your levels of interest, just so long as you play by the rules. Let's take a look at what these other accounts offer and how they work.
Santander 123 account
The Santander 123 account pays out up to 3% interest on the money in your current account. Balances of 1,000 to £2,000 will attract 1%, £2,000 to £3,000 will earn 2% and between £3,000 and £20,000 you’ll get 3%.
The interest rate is lower than that from Clydesdale and Yorkshire Banks, but you'll earn interest on a larger amount and the interest arrangement is permanent.
It also has the advantage of paying out up to 3% cashback on some of your direct debits. Indeed, in order to earn interest you'll need to set up two direct debits on the account, pay in £500 a month and pay a £2 monthly fee.
Nationwide FlexDirect Current Account
The Nationwide FlexDirect account pays out the highest rate of 5% interest on balances of up to £2,500. This beats any other savings account hands down, but the rate only lasts for 12 months.
To benefit from the interest you’ll need to deposit £1,000 every month into the account.
Lloyds Classic Account with Vantage/TSB Classic Account with Enhance
Customers with either the Lloyds Bank Classic Account with Vantage and/or TSB Classic Account with Enhance accounts can earn up to 3% on their money when they pay in £1,000 a month.
On balances of £1 to £1,000 you’ll earn 1.50%, on £1,000 to £3,000 it increases to 2% and between £3,000 and £5,000 you’ll get the full 3%.
Vantage and Enhance can be added onto these accounts for free, and you can have up to three of each account.
[Could your money work harder in a high-interest current account? Compare rates now]
Savings accounts slump
With a rate of 4% the Clydesdale and Yorkshire account beats every mainstream savings product currently on offer.
In the instant access range the best rate you can hope for is 1.70% from BM Savings with its Online Reward account. You can open this with £1,000 but there is a bonus of 1.20% for the first year so you'll need to move your money again then to get a decent return.
Rates on fixed term accounts tend to be higher, but at the moment they’re pretty dismal too.
The best rate available is 3.50% from Skipton Building Society and First Save, but to earn this you need to lock your money away for seven years. Drop the term to five years and you can get a rate of 3.11% from Secure Trust Bank.
Peer-to-peer savings
One area which has grown hugely in popularity is peer-to-peer savings.
Zopa, Funding Circle and RateSetter have seen huge boosts in customer numbers from savers searching for income. They work by cutting out the bank and linking up people that want to borrow with those willing to lend. As a result it works out cheaper for borrowers, while lenders get a better return than if they stuck their cash in the bank.
There are two catches with these accounts: one is they are not regulated and the other is they are not covered by the Financial Services Compensation Scheme, which protects up to £85,000 of money deposited if an institution goes under.
[Savers 'forgotten' by banks pour money into peer-to-peer]
Savings versus current accounts
The Government’s Funding for Lending Scheme has sent interest rates plummeting on savings accounts and as long as it exists, things aren’t likely to improve much.
So instead of locking your cash away for the long term, a current account which pays interest is another option. It’ll give you a little extra income but still retains the flexibility of letting you withdraw money whenever you need to.
That way you can earn interest on your savings and when rates start to improve in the savings market you’re in a position to transfer the cash over.
