Tweet
Regular savings accounts are the latest best-buys, offering impressive interest rates. But they can quickly go wrong for you, says Sam Dunn
Regular savings accounts, where you pay in a set sum each month over the course of a year, may be the new top dogs in the savings world but they come at a price: brutal penalties that can wipe out a year's interest at a stroke.
These accounts have topped the best-buy tables in recent weeks by paying up to 7% in interest. Such rates are impressive set against the Bank of England base rate's nosedive from 5% in early October to 0.5% which has destroyed the rates on offer to millions of savers. According to Moneyfacts data provider, the average rate on ordinary variable savings accounts has slipped from 3.71% to 0.96% over that period.
Some of these accounts are proving so popular they are being pulled. Last week, a table-topping 7% rate saw provider Saffron building society scramble to rein in its regular saver cash Isa early and, for a short spell, allow only households in East Anglia to open an account, with a further string attached: they had to use its branch network.
Elsewhere, online bank First Direct offers existing customers a very healthy 7% regular saving cash ISA; Barclays offers a regular savings account to all at 6%; Principality building society offers 4.5%; and Abbey 4%.
However, so-called "regular" savings, named after the regularity of the monthly sum you pay in, are vastly different from ordinary savings accounts and continue to trip up savers.
Instead of being open-ended, most of these drip-feed accounts last for just one year and impose tough limits on how much you can save, usually between a lower and upper threshold (often £25 to £250).
After a year, your cash is usually then swept into a lacklustre account paying a lot less than the headline rate you've been enjoying. Crucially, their headline rates may be as high as 7% but you won't earn this amount on all your money during the year: you're only paid 7% on what's actually in your account.
So say you invest £100 a month for a year starting in January, you'll only earn this top rate on £1,200 invested over the year for the month of December: in each previous month, 7% is paid on your cumulative total - that is £100 in January, £200 plus interest in February, £300 plus interest in March, and so on.
But it's their harsh penalties for withdrawing cash that wields the biggest stick: miss a payment and you can lose every penny of interest built up over a year.
Fail to have enough funds in your account to pay into First Direct's regular saver, and instead of receiving 7% on all your money, the rate drops to 0.5% on all money saved, even if it's for 11 months.
It's the same story at the Principality: its one-year St David's Day Regular Saver at 4.5% on savings between £20 and £500 per month is a generous rate, but if you either miss a payment or make a withdrawal during the year, you will see your interest plummet to a level that matches the lowest tier on Principality's Instant Access account - a pitiful 0.1% - on all your cash.
Although rival account Barclays doesn't administer such stern punishment, it will dock the amount paid to you by nearly half, to 3.03%, in the month you miss. This is a more common practice by regular saving accounts, so it's worth double-checking their severity.
"There's always a sting in the tail with regular savings; be sure that you can always see the 12 months through," warns Andrew Hagger of Moneynet.co.uk price comparison site.
Darren Cook at Moneyfacts agrees, and emphasises that a direct debit is an absolute must. "To make the absolute most of your money, it's worth paying into the regular savings account from a high-paying instant access account," he says.
Aside from regular savings accounts, the best rates are being offered to those willing to tie up their money for a year or more in a fixed-rate account.
Abbey is paying 4% on a two-year fixed-rate bond, with a minimum deposit of £30,000, while the AA has a one-year bond for deposits of £500 or more paying 3.75%.
guardian.co.uk © Guardian News & Media Limited 2009 | Use of this content is subject to our Terms & Conditions | More Feeds
More...
