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Why these current accounts are better than savings accounts
It really isn’t a savers' market at the moment.
Interest rates are tumbling daily, and it seems like the paltry best buy accounts that do come up are quickly withdrawn once more than a few eager savers get wind of them.
In fact, according to financial information website Moneyfacts, there are only five Cash ISAs that can beat or match inflation (currently 2.8%) while no instant access savings accounts are able to manage it.
It’s a sorry state of affairs.
Who’s to blame?
The record low base rate - which has been around for four years now – is often blamed for the dismal savings rates, but it’s not the only factor.
In January, the Bank of England admitted that the Funding for Lending Scheme has played a major part in driving down rates for savers.
The scheme was introduced last summer in a bid to boost lending by providing banks and building societies with cheap loans.
But this access to cheap cash means banks and building societies don’t need to rely on our savings to balance their books right now.
Time for new ideas
However, even though the banks aren’t desperate for our saving pots they are still quite keen on gaining more current account customers.
And oddly that’s where savers can cash in.
At the moment the Santander 123 Current Account, Nationwide FlexDirect, and Lloyds TSB current accounts with Vantage all pay healthy levels of credit interest.
So in theory these current accounts where we put all our spending money could double up as a savings vehicle.
What’s on offer?
The Santander 123 Current Account is famed for paying up to 3% cashback on direct debits but it can also serve as a very attractive savings account. Here's how the interest rates works:
Balance | Interest rate |
£1,000 to £2,000 | 1% |
£2,000 to £3,000 | 2% |
£3,000 to £20,000 | 3% |
If, for example, your balance is £4,000, you'll earn 3% on the whole balance, not just on the money above the £3,000 threshold.
With the Nationwide FlexDirect account you get an even better return of 5% but this time only on balances up to £2,500 – so not great if you are able to squirrel away more. What's more, you'll only earn 5% for the first year you have the account. After that, the rate falls to 1%.
You don’t get cashback with the Nationwide account but you do get access to Flexclusives, which are special deals on products like mortgages and loans exclusive to existing customers.
Meanwhile, Lloyds TSB offers those who add Vantage to their current account the chance to earn 3% on balances between £3,000 and £5,000. Vantage is free but it means you must deposit £1,000 each month and stay in credit to earn the interest.
As you can see there is potential for a dual role with these current accounts. But can they really compete with what’s on offer in the savings world?
[Related link: Compare all the top current accounts in one place]
Current accounts vs. savings accounts
In the table below I have picked out the market leading products for instant access savings accounts, Cash ISAs and fixed rate bonds to see how the current accounts stack up against them.
I have ordered the table by net returns rather than gross rates to give you a clearer picture of the actual return.
Account | Type of product | Gross interest rate | Net interest rate for basic rate taxpayer | Net interest rate for higher rate taxpayer | Minimum deposit | Maximum deposit | Access |
Current account | 5.00% | 4.00% | 3.00% | £1 | £2,500 | Unlimited | |
Coventry BS 60 Day Notice ISA | Notice Cash ISA | 2.80% | 2.80% | 2.80% | £1 | £5,640 | 60 days' notice |
Cheshire BS ISA Saver (Issue 1) | Instant access Cash ISA | 2.50% | 2.50% | 2.50% | £1,000 | £5,640 | Unlimited |
FirstSave Five-Year Fixed Rate Bond Issue 1 | Five-Year Bond | 3.05% | 2.44% | 1.83% | £1,000 | £2,000,000 | None |
Current account | 3.00% | 2.40% | 1.80% | £3,000 | £20,000 | Unlimited | |
Lloyds TSB Current Account with Vantage | Current account | 3.00% | 2.40% | 1.80% | £3,000 | £5,000 | Unlimited |
Islamic Bank of Britain Sharia'a Compliant Fixed Term Deposit** | Two-Year Bond | 2.63% | 2.10% | 1.58% | £1,000 | None | None |
Vanquis Bank High Yield | Three-Year Bond | 2.56% | 2.05% | 1.54% | £5,000 | £250,000 | None |
Investec Fixed Term Deposit | One-Year Bond | 2.15% | 1.72% | 1.29% | £25,000 | None | None |
Coventry BS Online Saver | Easy access | 2.00% | 1.60% | 1.20% | £1 | £250,000 | Four withdrawals a year |
*Account charges a £2 monthly fee
**Anticipated profit rate
As you can see the Nationwide FlexDirect current account is top of the savings market offering a rate of 5%. This account even beats the best easy access Cash ISA and can beat inflation for both tiers of tax payer. However, you can only earn this return on balances up to £2,500 – great for new savers but not a lot of use to those who have a lot stashed away already or those that plan to.
Apart from the Coventry and Cheshire Cash ISAs the only other account that can challenge the next best current accounts is a five-year bond from FirstSave. But with only a tiny difference on the after tax interest rate it hardly seems worth locking your money away for so long.
With the Santander 123 account you can get a rate similar to a five-year bond but unlimited access to your cash. Plus unlike Nationwide you can save more as the 3% rate applies to balances of £3,000 to £20,000.
However, you will need to factor in the £2 monthly fee on the Santander 123 account to make sure you're getting the best deal. You end up paying £24 a year, which sounds like a lot, but for an account which pays high levels of cashback and credit interest it's a bargain in my book.
[Related link: Could you earn more interest on your saving by lending your money to other people?]
Verdict
If you’re chasing the best return for your cash considering a current account instead of or as well as a savings account makes a lot of sense at the moment.
The evidence seems to be stacked against easy access savings, Cash ISAs and fixed rate bonds. Current accounts pay more, come with other perks and provide easy access to your pot.
If you have one of these accounts already you should consider using it for your savings. Otherwise you might want to switch. It might seem like a lot of upheaval but switching current accounts can be easy.
