You probably think regular savings accounts paying high interest rates are worthy but dull. But use one of these accounts to recycle your existing savings and you can clock up a healthy 16.5% in just three years.
Lots of banks and building societies offer regular saver accounts with high interest rates payable for a year. Many require you to open a current account with them, but some don’t. And while the banks pitch them at people who are saving out of their income, there’s nothing to stop you using these accounts to recycle your lump sum savings and earn more interest.
A typical account is the Halifax Regular Saver, paying 7% interest on monthly savings of between £25 and £500. At the end of the year, the money is transferred to another Halifax account - but you can immediately switch it to wherever you want.
Customers can earn extra interest
These accounts are great if you have a monthly surplus to save. If you’re a customer of HSBC (10%), Barclays (7.75%), Abbey (10%) or Alliance & Leicester (12%), sign up for such an account and clock up the extra interest.
But why stop there? Say you have £12,000 in a savings account. You can sign up for four of these schemes at £250 per month each and recycle £1,000 per month at the higher interest rate. It just requires a little organisation: make one monthly transfer of £1,000 from your savings account to your current account, and get the standing order payments from your current account to the four regular savers to happen a few days later.
I’ll assume you have a current account with Abbey or HSBC, so that you can earn 10% on the first £250 per month. Then you sign up for £250 per month each with Halifax (7%), Barclays (7.75%) and Skipton Building Society (6.8%). So in all you will put £12,000 into the accounts over the 12 months.
Tax will eat into your savings
Assuming you pay tax, 20% income tax will be deducted at source from all your interest. So at the end of the year your four accounts will contain £12,355. And you’ll also have earned interest on the savings account from which the money was drawn - another £288. So you start the next year with £12,643. You transfer all the cash back to the savings account you started with and you sign up with the same four accounts again. At the end of the second year you have £13,300, and at the end of the third year (same again) £13,974.
The average annual rate of interest over the three years is 5.5% net of tax, equivalent to 6.8% before tax. While that may not sound a big gain over normal savings accounts, remember that the rate of interest on these regular savers is fixed - once you’ve signed up, you’re guaranteed to get that rate for the following 12 months. At a time when interest rates are likely to be falling, that protects you from losing interest. And because the banks use these accounts as an ‘enticer’, they’re unlikely to drop their regular saver rates sharply even if the Bank of England does cut its base rate and all normal savings accounts follow suit and cut their rates.
Certainly if you’re saving up for a deposit on a home, using these accounts is worthwhile and will speed up your accumulation of capital. But take note - all these accounts have penalties if you make withdrawals or miss a monthly payment. So only use them if you are absolutely confident you can keep up the payments for a full year.
