Cheshire Platinum Monthly Saver offers 5% interest and instant access

You can't get an interest rate like 5% without catches, but this one from Cheshire Building Society is still worthwhile for some.

Cheshire Building Society's Platinum Monthly Saver has some catches, but its high interest rate compensates for this. It's suitable for people with lots of savings who already have an easy access savings account.

You get 5% AER until the end of January 2014. The interest rate is variable, although building societies have had a good record recently in not taking advantage of that. My research shows that they don't normally make massive cuts, without good reason, until a deal period ends.

The account is, alas, branch based, but you can set up a standing order to limit the inconvenience of paying in. You can also open and operate the same account through Derbyshire Building Society branches, if that is more convenient.

This account allows you just one free withdrawal before the deal ends. That's just one shot at instant access without penalty, but that is one more than you should expect with an account that has such a high interest rate.

One withdrawal still help you to get out easily if you need the money, if the interest rate is lowered too far, or if you find a better account somewhere else. You'll need to move your savings somewhere else after the deal ends.

In the meantime, you'll get a top interest rate. Only a tiny number of accounts, all of them with worse terms and conditions, currently pay more to new customers.

Here's the trickiest part

The bit that makes this account a little tricky is that it is a monthly saver. You have to pay in at least £100 but a maximum of £500 every month until the deal ends. You can miss one month, but miss two and you'll be offered the measly rate of just 1% interest on all your savings. And that's before tax is deducted.

This problem isn't insurmountable, though, provided you have lots of savings already and an existing easy-access savings account. More on that later.

Yes, you really do get a 5% interest rate

I can already hear some of you complaining that if you're saving monthly then you can't get the full 5% interest rate, except on money you put in right at the start. This isn't true.

You might not earn 5% interest, but you're still being paid at a 5% interest rate. Whether your latest deposit has been in the account for one month, six months or 12, you will earn the same interest every month of 0.41% before tax – which is a 5% annualised interest rate.

So, during the time any money is in this account, that money will be earning around twice as much as it would be in an easy access account paying 2.5%.

The bottom line is that, if you pay in £500 for 12 months, you'll have saved £6,000 and earned £130 interest after basic-rate tax. That's probably about four times as much as you'd have got in reward points when spending this in the shops.

How to use accounts like this

You have to use monthly saver accounts such as this correctly to increase the interest you're already earning in your normal savings account.

There are two ways to do this:

• The first is to pay any excess income you earn on a monthly or weekly basis into it.
• The second way is to pay into it on a monthly basis from existing savings in your easy access savings account, which will be paying you less interest.

In either case, once the deal ends, you transfer those savings to the top easy access savings account available at that time.

Monthly saver accounts are supposed to be targeted at those using the first way – paying in excess income – in order to start building up a savings pot from scratch. However, I don't think these people are best suited to it.

If you have no other savings there is a danger that you'll suddenly need this money, as well as your future spare income. This might be for an emergency, or for a new project, such as a training course.

In that case, you might no longer be able to pay in the monthly minimum £100 and you will earn pitiful interest as a result. That's why people with meagre existing savings could be better off opening an ordinary easy access account and paying regularly into that.

Check out Nottingham Building Society's account too

Nottingham Building Society has also released a monthly saver. You can't make withdrawals, not even one, and you can deposit a maximum of £100 per month (minimum £10), so the conditions are worse than Cheshire's. However, it pays a fixed interest rate of 6%.

You might consider this as an alternative, or in addition, to Cheshire's account, depending on how much savings and spare income you have.

Whatever you do, don't ever leave spare money sitting in a current account that pays little interest. Get an easy access account, and look for special deals like Nottingham's and Cheshire's to boost the overall interest you earn. Return your money to a top easy access account when the deal ends.

Read about it in Nottingham BS launches 6% savings account.

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