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Put your savings in a current account
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 Interest rates are tumbling daily, and it seems like the paltry best buy accounts that do come up are quickly withdrawn once more than a few eager savers get wind of them.
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.
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.
Elsewhere 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?
Current accounts vs. savings accounts
In the table below we have picked out the market leading products for easy access, Cash ISAs and fixed rate bonds to see how the current accounts stack up.
I have ordered the table by net returns rather than gross rates to give you a clearer picture of the actual return.
Account | Type | 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 | |
Leeds BS Five-Year Fixed-Rate ISA | Cash ISA (five-year bond) | 3.00% | 3.00% | 3.00% | £1 | £5,760 (2013/2014 allowance, but accepts transfers in from past ISAs) | None for five years |
Secure Trust Bank Fixed-Rate Bond | Five-year bond | 3.01% | 2.41% | 1.81% | £1,000 | £1,000,000 | None for five years |
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 |
Coventry BS Fixed Rate ISA (18) | Cash ISA (three-year bond) | 2.35% | 2.35% | 2.35% | £5,760 | £5,760 (no transfers accepted) | None for three years |
Britannia Fixed Rate Cash ISA | Cash ISA (two-year bond) | 2.25% | 2.25% | 2.25% | £5,760 or £1 if transferring previous tax years' balances | None (transfers accepted) | None for two years |
Tesco Bank Instant-Access Cash ISA | Easy access Cash ISA | 2.00% | 2.00% | 2.00% | £1 | £5,760 (no transfers accepted) | Unlimited |
Britannia Fixed Rate Cash ISA | Cash ISA (one-year bond) | 2.00% | 2.00% | 2.00% | £5,760 or £1 if transferring previous tax years' balances | None (transfers accepted) | None for one year |
Three-Year Bond | 2.50% | 2.00% | 1.50% | £2,000 | £1,000,000 | None for three years | |
Islamic Bank of Britain Sharia'a Compliant Fixed Term Deposit** | Two-Year Bond | 2.30% | 1.84% | 1.38% | £1,000 | None | None for two years |
Britannia One-Year Fixed-Rate Bond | One-year bond | 2.03% | 1.62% | 1.22% | £1,000 | £1,000,000 | None for one year |
Britannia Select Saver 3 | Easy access | 1.75% | 1.40% | 1.05% | £500 | £1,000,000 | Four penalty-free 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 five-year fixed 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.
With the Santander 123 account you can get a rate similar to a five-year fixed rate cash ISA or bond, but can get 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.
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 saving accounts, 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 the new rules which have just come into force mean banks and building societies have to switch your bank account within seven working days or face a financial penalty. Read more about the Current Account Switch Service in Switch to a better bank account in just seven days.
