Is there any point opening an easy access savings account?

John Fitzsimons
by Lovemoney Staff John Fitzsimons on 13 November 2012  |  Comments 13 comments

As inflation rises again, low savings rates are once again in the spotlight.

Is there any point opening an easy access savings account?

It didn’t last long – after a couple of months of falling inflation, it’s back on the rise again.

The Consumer Prices Index measure found that inflation had risen from 2.2% in September to 2.7% (with university tuition fees largely blamed) while the Retail Prices Index measure found that inflation had moved from 2.6% to 3.2%.

The plight of the saver

All of which is grim news for savers as it means that once again finding an account that will actually help you increase your money in real terms becomes that much harder.

Basic rate taxpayers now need to find an account paying 3.37% a year, while higher rate taxpayers need to find accounts with rates of at least 4.5%. Basic rate taxpayers have 40 accounts to choose from that do that. Higher rate taxpayers don’t have a single one that isn’t an ISA.

The trouble is, all of those inflation-beating accounts involve locking your cash away for a few years. Who’s to say that what is an inflation-beating rate today won’t be a naff rate in six months’ time?

The easy access account

All of which brings me to my main bugbear – the easy access savings account.

Not only do these accounts not offer an inflation-beating rate of interest, but the rates on offer are actually consistently falling.

The top rate on offer today, from West Brom’s WeBSave Easy Access 5, pays a frankly pitiful 2.52% before tax and you can only open it with a minimum deposit of £10,000.

After that you have Derbyshire BS and Nationwide each offering accounts which can be opened with £1,000 paying 2.50%.

The after-tax returns on these accounts are 2.02% and 2% respectively. They wouldn’t even offer you a return on your cash if the Bank of England actually managed to keep inflation at its target of 2% (and don’t hold your breath on Mervyn and the gang managing that anytime soon).

Falling rates

Just a few months ago the rates on these accounts were far better. They still weren’t amazing, by any stretch, but they were far more enticing than today’s offerings.

Let’s take June. Here are the top five easy access accounts on offer on 29th June this year.

Account

Interest Rate AER

Minimum Deposit

Withdrawal limits

Bonus

Coventry BS Telephone Saver

3.25%

£500

Unlimited

1.25%

West Bromwich BS Direct Bonus Account 4

3.22%

£10,00

Four penalty-free withdrawals a year

1.71%

Santander eSaver Issue 5

3.20%

£1

Unlimited

2.70%

ING Direct Savings Account

3.19%

£1

Unlimited

2.64%

Derbyshire Netsaver Issue 3

3.06%

£1,000

Unlimited

2.06%

The top account just five months ago paid 0.73 percentage points more than the top rate today. That's a fairly significant difference.

Part of the problem may be the new Funding for Lending scheme, which has made banks and building societies less dependent on savers’ cash to fund loans. You can find out more in Is the Government to blame for falling savings rates?

What’s the point?

A 2% return seems a bit pointless to me. On a £1,000 balance that’s £20 in interest for a year. Doesn’t exactly get the blood racing does it?

Especially as you’ll have to open the account, set up a Direct Debit, keep on top of any changes in the rate on offer (as it usually isn’t a fixed rate, so could fall at any time) and keep an eye on the calendar so that you know when you’ve reached a year with the account, and the bonus is about to disappear.

Is it really worth the bother?

Where you should be putting your cash

I understand the appeal of an easy access account. I have one myself.

You want to build up a savings pot, and leaving the cash in your current account is just asking for trouble. And you don’t want to lock the cash up for ages because you might need to get your hands on it in an emergency.

But there’s a far better home for your money – the Cash ISA.

You can get Cash ISAs that offer you decent access to your money if the boiler suddenly breaks, but they also offer you a far better return on your cash. Here are some of the best.

Account

AER

Notice

Minimum investment

Accepts transfers in?

Coventry BS 60-Day Notice ISA

3.25% (including 0.5% bonus for 12 months)

60 days

£1

No

M&S Bank Advantage Cash ISA

3%

Instant

£100

Yes

Cheshire BS Direct Cash ISA

3% (2% bonus until January 2014)

Instant

£1,000

No

ING Direct Cash ISA

2.8%

Instant

£1

No

Earl Shilton BS 90-Day Cash ISA

2.7%

90 days

£10

Yes

Not only are these rates higher than those on offer from the easy access accounts, they are also free of tax – you don’t pay a penny to the taxman on the interest earned in an ISA.

There's also the option of a peer-to-peer savings account. I have some money in a monthly rolling account with RateSetter, where my cash is lent out directly to other users of the site. And you get to set the rate of interest – my money is currently loaned out at a rate of 3.2%.

Am I being harsh on easy access accounts? Or are they a complete waste of time at the moment? Let me know your thoughts in the Comment box below.

More on savings

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NatWest pulls top instant access savings account

The top Child Trust Funds

The top fixed rate savings bonds

Premium Bonds winners

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Comments (13)

  • Kent
    Love rating 10
    Kent said

    An ISA would be ok for an instant savings account if only the rules were not so complex. I have just applied for an ISA, intending to put variable amounts up to about £1,000 in each month, up to next April. However the Information Pack points out that the ISA might be withdrawn at any time, and then I shall not be able to deposit any more into an ISA this year, because one can only deposit into ONE ISA in each year. What's the betting they will either withdraw this particular ISA, or reduce the rate, next month, or sooner?

    Report on 21 November 2012  |  Love thisLove  0 loves
  • PoohBah
    Love rating 23
    PoohBah said

    @Kent: you should still be able to add to the ISA during the current tax year, as long as you do not exceed the annual deposit limit. If the ISA is withdrawn, that just means it will not be available to new investors: it should not affect those who have already opened the account. If they do reduce the rate, you can still transfer it to a new provider, as long as you transfer all of the current year's deposits. Should that be necessary, the new provider will make all the arrangements. What you cannot do is have two ISAs running concurrently and accepting deposits for the same tax year.

    Report on 21 November 2012  |  Love thisLove  0 loves

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