The regular savings account is where many of us started our savings pot.
Offering rates that couldn’t be matched anywhere else, they paid a rich reward for those dedicated enough to set aside a small amount each month.
As recently as this Spring, there were no fewer than four such accounts paying a generous 5% rate, albeit with some strings attached.
Now, with M&S Bank’s announcement that its 5% regular saver will only pay 2.75% to new savers, it’s time to rethink who regular savers are really suitable for.
Good luck beating inflation
Let’s assume you started saving this month and pledged to set aside £100 in the most generous regular savings account on the market, which pays 2.75% interest.
After 12 months of diligent saving, your £1,200 worth of savings would be worth £1,217.80, meaning it had grown by around 1.4%.
Unless we’re in an unusual period of deflation, savers need to factor in the rising cost of living.
Despite inflation currently sitting at a three-year low of 1.5%, that means your money would actually be worth less in real terms than when you started if inflation remained constant.
Obviously, it fluctuates from month to month, but it’s a startling thought nonetheless.
What a horrible message to send to new savers that even with the best regular saver, you’ll likely struggle to break even!
Thankfully, it is possible for most savers to earn almost double that interest with an account that offers more flexibility.
New to savings? Consider a current account instead
It’s hardly a secret that current accounts are a great option for new savers or those with small pots.
Nationwide’s FlexDirect has long been the standard-bearer here, paying 5% on the first £2,500 held in the account for one year (falling to 1% thereafter).
With the best UK-wide regular savers* now paying a maximum of 2.75% and generally limiting savings to between £2,400 and £3,600 a year, can you really argue that there is any better option for newcomers than Nationwide’s current account?
What’s more, if you know someone who already holds a Nationwide account, you can each pocket a £100 bonus when you sign up.
*There are some local banks and building societies that offer slightly higher rates and savings limits but aren’t practical if you don’t live in the area.
Capital at risk
But current accounts are a faff
From a purely rate-based comparison then, the current account option is streets ahead.
However, as anyone who switches regularly to bag the generous welcome bonuses will attest, most current accounts force you to jump through hoops to get the headline offer.
And besides, switching current accounts is usually more time-consuming than opening a regular savings account.
But it’s worth stressing that all three of the current top-paying regular savers are linked to that bank’s current account, so you’d need to have opened up a current account anyway to get access to it.
As for Nationwide, you have to pay in at least £1,000 a month to get the 5% offer (so you’ll need a salary of at least £12,000 that you pay in), which we’d argue is manageable for most people.
When you consider the greater flexibility savers will get from a current account (you have unlimited withdrawals for a start), the current account also looks the better bet from a practical point of view.
Now, we should give honourable mentions to a couple of decent regular savers that don’t force you to open up a bank account.
First, there’s the Principality Building Society Regular Saver with a rate of 2.7%, although the maximum monthly savings limit of £125 is pretty miserly.
Coventry’s Regular Saver allows a far more generous £500 monthly deposit, but the rate is lower at 2.5%.
Both are good options, but if you are able to meet the requirements then the Nationwide route remains the best option for new savers, assuming you aren’t willing to try investing that is.
Is drip-feeding still a good idea?
We’re not saying regular savings accounts are no longer an option for anyone.
For those who already have a large savings pot, the £2,500 limit at Nationwide means that account could only really form one part of a savings strategy.
One common trick used by savers is called drip-feeding, where you put your funds in a top access account then filter the maximum amount allowed each month into a top regular savings account.
This strategy used to be hugely profitable, earning you between 3% and 5% depending on the accounts you chose and the size of your pot.
But the sharp drop in regular savings rates means this isn’t always the best strategy.
Consider the following two examples.
Example 1
If you put your £10,000 savings pot in the Marcus access account (paying 1.45%) and then drip feed the maximum allowed £300 a month into the first direct Regular Saver (2.75%), you’ll end up earning a total of £170 interest.
Use Coventry’s Regular Saver instead, which pays a lower 2.5% but allows £500 monthly deposits and you’ll increase your earnings to £179.
Had you simply put your £10,000 in the top-paying fixed-rate saver – Metro Bank’s 1.8% – you’d end up with around £180 in interest.
If you’re happy with Shariah ‘savings’ products, your expected profit rate would be around £185.
That’s slightly more interest with less effort, although admittedly you’d have less access to your funds throughout the year.
Example 2
If you have a £5,000 savings pot and drip feed your savings from Marcus (1.45%) to first direct at a rate of £300 a month, you’d earn £97 in a year. Funnel it through Coventry’s Regular Saver instead and you hit £100 in interest.
That beats the £91-odd you’d earn with a top fixed-rate account (or £93 with a Shariah product) plus you get more access to your money.
As this illustrates, it really depends on your situation as to whether drip-feeding is the best option.
You can use MoneySavingExpert’s handy drip-feed savings calculator, which you’ll find lower down on this page, to help you work out whether the extra effort is worth your time.
What do you think? Are you still a fan of regular savers despite the falling rates? What is the best strategy for maximising interest on savings? Share your thoughts in the comments section below