Earn 4% on instant access savings

by Christina Jordan on 04 January 2011  |  37 comments
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Want to earn 4% and get instant access to your savings? It's easy...

Everybody wants to earn a good rate of interest on their savings, although it's not exactly easy when interest rates are so low.

Instant-access savings accounts are faring the worst, with average rates still well under 1%.

And while the top fixed rate bonds will pay 4.85%, to get this rate you will be forced to lock your money away for five years.

That's no good if you need to get your hands on your cash quickly, is it?

At the same time some current accounts are paying enormous rates of interest - as much as 5% AER. Just take a look:

So why not just open one of these current accounts and transfer your savings into it. Who cares whether it's labelled a current account or savings account? It doesn't matter - right?

Unfortunately it's not that straightforward, as these super high interest current accounts come with strings attached. But it is easy to work the system to your advantage.

Here's how to do it...

Jumping through hoops

The current accounts shown in the table above have all introduced minimum monthly funding requirements. This is to try to encourage you to use the account as your primary current account, and to have your salary paid into it.

With both the Santander and Lloyds TSB accounts you must deposit at least £1,000 a month.

Of course, this may well be significantly more than you actually intend to save each month.

But don't be put off. With all three of these accounts you are able to withdraw as much money as you have in credit. So you could make your minimum monthly payment one day, and withdraw it all (or some of it) the next day.

Get the balance right

The interest rates on offer from these providers are also only available up to a maximum limit, so if you have a large savings pot you need to be careful. For example the Santander account above only pays 5% on balances up to £2,500, and anything on top of that attracts interest at just 0.1%.

The Lloyds TSB account is slightly different, as the 4% interest rate is only paid on balances between £5,000 and £7,000. You need to maintain your balance within this tier or else attract a lower rate of interest on all of your money.

More for your money

What if you have more than £2,500 in savings, and want to earn 5%? Unfortunately, Santander limits the accounts above to one per customer. This applies to a single or joint account so you can't open one of each. Of course a couple could open a single account each and fulfil the minimum deposit criteria by shunting £1,000 back and forth each month.

Lloyds TSB is more flexible. It allows each customer to open up to three Lloyds Vantage accounts. So you could potentially earn 4% on savings up to £21,000, by sticking £7,000 in each account.

It might seem like a lot of hassle, but remember that you can set up standing orders to do the transfers for you each month. And as a reward, you'll get instant access to your savings while earning as high a rate of interest as you'd get with the best five-year fixed rate bond!

Bonus rates

Sounds brilliant - so what are the other catches?

Well, on the Santander account, the interest rate includes a temporary bonus rate for the first 12 months, which effectively means the account is far less appealing after the first year.

Recent question on this topic

• kevsmith asks:

  Is the ING Direct saving account for me? Do you have personal experience e.g. what is there customer service like.

  • 
    MikeGG1 answered "No, it isn't best for you. For your current savings, try a 1 year fixed rate bond. You..."
  • 
    kevsmith answered "Thanks for the reply. Would it be best to have my savings and monthly savings in two different..."
  • Read more answers

However, in fairness bonuses have become more prolific across the market and are on many best buy instant access savings accounts as well.

The main difference is just how big the year one bonuses are on these current accounts - the 5% AER drops to 1% after 12 months with both.

So you definitely need to remember to move your money once the year is up.

The Lloyds TSB account paying 4% does not include a year one bonus (though of course the rates are variable).

Direct debit dilemma

Unfortunately, Santander has cottoned on to the fact that many people were using its current account as a savings account.

So, in order to eligible for the high 5% rate, it now forces you to transfer over your direct debits from your existing current account, as well as paying in the £1,000 a month!

This means you will find it hard to avoid switching your existing current account to Santander, which could be a lot of a hassle. And Santander has a reputation for terrible customer service among lovemoney.com readers.

Luckily, Lloyds TSB doesn’t muck about with direct debits. As long as you fund the account with £1,000 a month, you’re eligible for the 4% rate.

Other options

If jumping through the hoops above to boost your interest rate is just a step too far for you, there are other options.

One novel idea is to use the accounts as intended - as a current account - and move your banking to them. Then all you need to do is ensure your keep a sufficient balance to make the most of the high interest rates available.

But if you would prefer to keep your current account where it is, and have your savings in a standard savings account, one of the best accounts around is the Coventry BS eNotice account, which pays 3.05%. Remember though that you'll have to give 30 days' notice before you can get you hands on your cash.

If you're after easy access, the Nationwide's MySave Online Plus is worth a look, as it pays 2.95%.

Finally, of course, if you are a taxpayer, a cash ISA could be a smart option. Although rates on ISAs look pretty low, with the majority paying less than 3%, because ISAs are tax-free the net return is higher than most easy access accounts. For example, a higher rate taxpayer would have to find an easy access savings account paying 5% to earn the equivalent amount of interest as an ISA paying 3%. Looks a lot more appealing now doesn't it? Have a read of Top new ISAs for savvy savers

Have you played the current account high-interest savings game successfully? If so, please share your experiences using the comments box below!

This article has been edited and updated from an earlier version published last year.

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