The current account that beats the best savings accounts

Can the 3% credit interest available on the Santander 123 Current Account beat the best savings options around at the moment?

Savings have been in the doldrums for some time now. Each day we receive updates reporting yet more rates have been slashed or accounts withdrawn.

Many lay the blame on the record low base rate, now in its 46th consecutive month, as well as the Funding for Lending Scheme introduced in 2012. This combination has enabled us to borrow cheaply with low rates on personal loans and mortgages, but has virtually annihilated the rates we get on our savings.

With no rise in the base rate predicted anytime soon and the Funding for Lending Scheme sticking around until 2014, now is the time to start thinking creatively on how to protect your pot from paltry rates and the eroding affects of inflation (currently 2.7%).

According to financial information website, Moneyfacts.co.uk , only four accounts (which are all ISAs) can match or beat inflation for taxpayers at the moment. So now really is the time for some new ideas.

One we've been debating for a while now is the value of putting savings into a current account that pays a good level of in-credit interest. The current market-leading rate comes from the Santander 123 Current Account which pays 3% on balances from £3,000 up to £20,000.

So let’s see how the market-leading savings accounts stack up.

123 vs. easy access Cash ISAs

Let’s start with the first port of call for savers – a Cash ISA.

When you take out an ISA you’re instantly 20% better off if you’re a basic rate taxpayer or 40% better off if you’re on the higher rate of income tax, as these accounts pay interest tax-free.

According to Moneyfacts the average rate on an easy access Cash ISA at the moment is 1.50%. The market-leading account comes from M&S Money with its 2.75% Advantage Cash ISA. But this account is to be withdrawn from sale on the 21st of January 2013, and for those that take it out in time, the rate is scheduled to drop to 2.25% on the 6th of March 2013 anyway.

The next best rate I could find comes from Selftrade. The Cash ISA Issue 1 pays 2.51% tax-free. So let’s see how the Santander account compares:

As you can see, because ISA rates aren’t impacted by tax the Santander 3% offering doesn’t do too well up against Selftrade's Cash ISA Issue 1.

However, the ISA comes with a fixed rate bonus of 1.71% which will fall away after 12 months. The variable rate will fall from 0.9% at the end of January to 0.79% and is paid monthly.

Going for the Santander 123 Current Account removes the stress of moving money around, offering a more upfront rate with no temporary bonus. That said it is always a good idea to take advantage of your tax-free allowance and build up a tax-free pot.

123 vs. instant access accounts

But after you’ve reached the limit on a Cash ISA you might want to keep any other savings flexible via an instant access savings account.

The best on the market at the moment comes from the Post Office with its Instant Saver which pays 2.1%. Believe it or not this rate is pretty beefy when you consider the average rate on an easy access account is just 0.85% today, according to Moneyfacts.

So how does the 123 account stack up against this market leader?

It’s clear to see that Santander’s rate completely blows the Post Office out of the water; it pays a better rate that is free of any temporary bonus. So the best home for your savings in this case would be with the 123 Current Account.

123 vs. fixed rate bonds

In general locking up your money for a year or more gives you access to better rates.

The average one-year bond at the moment pays 1.95%, two-year bond 2.25% and five-year bond 2.53%, whereas instant access accounts only pay 0.85% on average and no notice cash ISAs 1.5%, according to Moneyfacts.

So can the best fixed rate bonds give the Santander 123 Current Account a run for its money?

As you can see the First Save Five-Year Fixed Rate Bond is the top paying account for both basic rate taxpayers and those on a higher rate.

But it hardly seems worth locking your cash away for five years when the 123 account pays just 0.04% or 0.03% less and offers instant access.

Elsewhere the market-leading two-and one-year bonds pale in comparison to the Santander account. The top one-year rate comes in way below the current account while the two-year bond is only able to match it.

At the moment it doesn’t seem worth locking up your cash when you can leave it to grow at an equal or better pace than the best bonds on the market.

Verdict

It’s a hard to stomach that market-leading savings accounts, apart from a few top Cash ISAs, can't cut it against a current account.

There's little doubt in my mind that the Santander 123 Curent Account comes out better than the best instant access account and fixed rate bonds at the moment. But before you sign up here's a round up of the pros and cons to give you some more food for thought about whether the account is worth it.

Pros

• As well as generous in-credit interest tiers you also get tiered cashback up to 3% on bills you pay for via direct debit.
• You have easy access to your pot.
• Setting up a 123 current account gives you access to the 123 credit cashback card fee-free. 

Cons

• You need to pay in at least £500 a month, set up two direct debits on the account and pay a £2 monthly fee to get all the benefits of the account.
• You can only earn the top tier 3% interest rate up to £20,000, whereas other savings accounts let you save much more.
• Many of the market leading savings accounts give you access to the best rate for deposits as low as £1 up to £1,000. Santander requires £3,000 to 'start saving’ at 3%. Balances from £1,000 earn just 1% and balances from £2,000 get you 2%. Anything below £1,000 does not earn any interest in the 123 account.
• Having your savings mixed in with your current account might be too much temptation and you could end up dipping into your pot more than you would do normally if it was kept in a separate account.

What do you think?

Could the Santander 123 Current Account be the best kept secret in savings?

More on savings:

The top fixed-rate savings bonds

The UK's best Cash ISAs

Top Cash ISAs for transfers

The best instant-access savings accounts