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

The best instant access savings accounts

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)

  • Mike10613
    Love rating 626
    Mike10613 said

    There doesn't appear to be any point in saving or investing for the future. Could this be why people don't save and invest for the future. The country is in a mess because we rely on the rich to invest, that gives them all the power. That has proven to be the power to corrupt and control. The whole financial system needs investigating and regulating. People need to invest directly rather than trust dodgy investment funds with their managers and traders on obscene bonuses. Pension funds offer little return in real terms and cash ISA's have such low interest rates they just rob people blind. The poor gets screwed and know they are. The middle classes get screwed and still believe the BS put out by the rich and their servants in the government and City of London.

    Report on 14 November 2012  |  Love thisLove  1 love
  • MK22
    Love rating 169
    MK22 said

    This is worrying! Mike10613 I actually agree with you. Will the world end tomorrow?

    Report on 14 November 2012  |  Love thisLove  0 loves
  • Meduza78
    Love rating 18
    Meduza78 said

    banks keep coming with interesting rates here and there. nearly two years ago i locked some of my savings in halifax for 4 years with 4.25% fixed rate. they are there and each year they earn a little bit more as the interest stays in that account.

    then AA came with online ISA instant access, or what it is. i do not remember the interest but i think it was about 3%, again, one of the highest on the market that time with money being available any time might i need it.

    then there is easy access saving account, something over 2% at santander, still higher than what my main bank would have given me that time. i have spread my savings in three different institutions and when i notice some movement on the market and it looks good and safe, i move my money again. for now i am sorted. i am not familiar with stock market or bonds or any other investments and i am not in a position to allow myself any loss. the only loss i cannot do much about is the inflation. but should people struggle to spend their money due to the economic situation, i expect a reverse motion - deflation.

    i keep saving my extra money as i manage to live on low income. one never knows when the extra money will be handy. it is better to have them than not. so there is point in saving money because the future is insecure. still better than spending it all right now for things i do not really need. if i have suffered terminal illness i would see it differently, but i am healthy and full of strength and plans for the future.

    Report on 14 November 2012  |  Love thisLove  0 loves
  • isobelsgrandma
    Love rating 41
    isobelsgrandma said

    But you can't put your money in a cash ISA if you've already used up this year's allowance. And, having used up the year's allowance, if you need to withdraw some to sort out the boiler, as far as I'm aware, you can't replace it in the current financial year.

    Report on 14 November 2012  |  Love thisLove  0 loves
  • Monty1983
    Love rating 0
    Monty1983 said

    I have just looked up the M&S Bank advantage cash ISA and its rate is going down to 2.75% on 10th December. I wouldn't mind betting that others will be following suit.

    Report on 15 November 2012  |  Love thisLove  0 loves
  • Geoff Carse
    Love rating 7
    Geoff Carse said

    Only the reintroduction of NS&I Index Linked Savings Certificates can save us now.

    Report on 18 November 2012  |  Love thisLove  0 loves
  • ronat42
    Love rating 71
    ronat42 said

    It does seem that the model is broken. I have a simple view which may be open to criticism or correction. Low interest rates should encourage us to spend on (hopefully) goods made by British companies sold by British retailers who pay British taxes used to be used by the British Government to pay for Health and education and all of the other things to repay us for being responsible law abiding citizens. Any savings should be used by Banks to lend to British companies to allow them to invest in improving their products or to responsible citizens to buy sensible priced homes and other essentials on an affordable basis. It all started to go wrong a very long time ago and interest rates are only a part of the picture but they are a good indicator.

    Wealth is created by good business practices not by manipulating other peoples assets and get rich quick schemes.

    All very much as put by Mike10613 in the first post.

    Report on 19 November 2012  |  Love thisLove  1 love
  • PoohBah
    Love rating 23
    PoohBah said

    John: You say your money is currently being lent out through Ratesetter at 3.2% - is that before or after allowing for income tax at your marginal rate?

    Report on 19 November 2012  |  Love thisLove  0 loves
  • celticlass
    Love rating 9
    celticlass said

    for the past 2 years I've used Tesco Christmas saver to save some money - they pay out £6 for £100 top- up!!!! Ok you can only save a limited amount but no one on the high street is giving that away!! Being on pension I'm not able to save very much that helps me put at an expensive time of year. I try to work it so that my vouchers to pay for offers therefore getting a bonus as well! Sometimes I use the vouchers to pay for my ordinary shopping which frees up cash for other things. BTW club card double up is back again this year - great if you can use these deals

    Report on 19 November 2012  |  Love thisLove  0 loves
  • PlasticPup
    Love rating 9
    PlasticPup said

    I suppose I'm one of those people caught in the middle. While I'm finally getting a bit of savings behind me, the rate is frustratingly low but at the same time my mortgage rate is very low as well so it's swings and roundabouts. The best I can do in my situation is to put some in an easy access savings account for emergencies and holidays and pay some extra off my mortgage each month. I figure that will be of more benefit to me in the long run than trying to shop around every now and then to make an extra few pounds on my savings.

    Report on 19 November 2012  |  Love thisLove  0 loves
  • killick_becki
    Love rating 63
    killick_becki said

    Depending on your mortgage t&c's you might always be better putting all your savings against your mortgage (providing the mortgage rate is higher than the savings rate you could achieve).

    This is because on several mortgage products you have the facility to "borrow back" your overpayments without needing permission. If you have this then you can think of your overpayments as going into a savings account paying out the same rate as your mortgage interest.

    I disagree with using a cash ISA like an instant access savings account though. The money put into ISAs should be there to stay, atleast in the medium term.

    isobelsgrandma makes the point that once you take it out, you can't put it back in this tax year.

    Personally I only use instant access savings accounts to hold money between getting paid and having to pay bills. I then overpay the mortgage by the maximum allowed without penalty. Then any remaining money goes into a stocks & shares ISA.

    Report on 20 November 2012  |  Love thisLove  0 loves
  • 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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