Earn the highest rate on your easy access savings

Want to earn a high, fixed rate of 5% on your easy access savings? It's easy with this clever trick....

It should go without saying that the recession has been a bit of a disaster for those Brits who have squirreled money away.

Savers have been the biggest losers of the last couple of years, with rates plummeting to new lows, and even though the wider economy is now out of recession and reporting modest growth, there’s little sign of that changing anytime soon.

So where can you get a decent return on your savings?

The ISA option

For those with a healthy chunk of savings behind them, ISAs have always looked a particularly attractive option, if only for the bonus that they are tax-free.

However, I find it pretty difficult to get excited about some of the pitiful rates on offer, even at the very top end. For example, while the Santander Direct ISA is one of the best around for big savers, with its top rate of interest kicking in for sums in excess of £9,000, that rate is still only 2.75% AER.

Better than nothing of course, but hardly a sum that gets the heart beating a bit faster.

In fact, if you have some serious cash stacked up, your best bet may actually be to take advantage of current accounts...

The current account trick

If you want to make the most from your money, a little bit of effort may be required. Plenty of current accounts offer a greater return on your cash than those on offer from ISAs, but they have much smaller maximum balances.

Therefore, to really milk your cash for all it’s worth, you will need to employ a divide and conquer strategy, splitting your money into a few different accounts to get as much of a return as possible.

So for this trick to work, how much money would you need? And where would you need to put it?

For this experiment, I’ll be working on the basis of the following figures.

That comes to £12,001. However, you’ll need an additional floating £1,000 to move between the accounts in order to ensure that you get the rates advertised, as all of these accounts require between £500 and £1,000 to be paid in on a monthly basis.

Here's how you do it.

1. Make sure you apply for all the accounts simultaneously so you can open them all in the same month. Put in the balances shown in the table above immediately, but make sure you stick the floating £1,000 in the Halifax Reward account. (So the starting balance in this account should be £1,001.)
2. Set up a standing order on the Halifax Reward account to move £1,000 from Halfax into the Alliance & Leicester Premier Direct account on the 1st of every month.
3. Set up a standing order on the Alliance & Leicester Premier Direct account to move £1,000 into the Santander Preferred In-Credit Rate account on the 7th of every month.
4. Set up a standing order on the Santander account to move £1000 into the Lloyds Classic account on the 14th of every month. 
5. Set up a standing order on the Lloyds Classic account to move £1000 into the Halifax Reward account on the 21st of every month.

The plus point to this is that you earn the best possible interest rate on the most money you possibly can from each of these accounts. The negative is that that £1,000 will earn a minimal rate of interest from each account, rather than interest in its own right.

The return you’ll get

So let’s take a look at how much you can expect from each account over the course of a year on the sums that you don’t move around.

Ignoring the floating £1,000 for a moment, on the money placed permanently in each of these accounts, you are looking at a year end gain of £590 before tax, or £484 after tax for basic rate payers (you won’t pay any tax on the gains from the Halifax Reward account as the £5 paid each month is after tax anyway).

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Now what about that floating £1,000? It will sit in each account for a week of each month, earning a minimal rate of interest. To give us an idea of what we can expect, I’ll presume that the money is in each account for 13 weeks of the year - in other words about three months of the year.

Each of the three accounts which pay interest pay rate of 0.1% on sums above their upper limit, so three months' interest will work out at about 20p each - a total of 60p.

A bit of effort

What’s undeniable is that this requires a bit of effort to set up. But once it's set up, the standing orders should do all the hard work for you. And as there is a gap of a week between each movement of the floating £1,000, this should ensure the money always arrives in time to meet the funding requirements of the different banks without costing you any interest.

To get the maximum return possible out of these current accounts, I've used an example where you have £13,001 of savings, giving you a return of 4.5% on the total sum (before tax). However, you don't need to have such a large sum in savings to benefit from this trick. In fact, the smaller your savings, the higher the rate you can earn.

For example, if you have £6,001 of savings, you could simply transfer back and forth between the Alliance & Leicester Premier Direct account, the Santander Preferred In-Credit Rate account and Halifax Reward account, and you'd earn £310 for your troubles - a return of 5.16%. And if you only had £3,501, you could transfer back and forth between, say, Alliance & Leicester and Halifax, and earn £185 - a return of 5.28%!

Of course, you do have to pay tax on your savings - but with ISA rates so low, it's likely you'll find the return is still better than you'd earn on an ISA. Plus the rates on most instant access cash ISAs are variable.

In fact, to earn a fixed rate of 5% in any other circumstances, you will need to lock your money away for a significant period of time. The ICICI Bank HiSAVE account pays 5% for example, but you have to lock your cash away for five years. Ouch!

By contrast, if you use current accounts to earn this sort of return, all of your cash can be accessed at any time!

More: Slash years off your mortgage | Avoid these eight savings accounts!

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