Savings left in your current account waste £1.7bn

You will get a poor return if you leave your savings to languish in a low interest current account.

It’s not surprising thousands of savers up and down the country have become completely disillusioned with poor interest rates. But I still believe those of you who have thrown in the towel, and simply leave spare cash languishing in your current account, could be making a big mistake.

There’s no doubt whatsoever most savings accounts leave an awful lot to be desired, but your current account is probably even worse, often paying no interest on your balance at all.

New figures from First Direct reveal a whopping £47.6 billion worth of savings is lying dormant in current accounts, and could be generating £1.7 billion in interest every year if it was moved to a more competitive home with a rate of 3%.

First Direct’s own customers have an average positive balance in their current accounts of £2,590 on the last day of the month before payday which could be put to far better use elsewhere. Interestingly, this amount has grown by 5% over the last 12 months up from £2,455 in September 2009. This suggests, while account holders are keen to rein in their spending, they’re missing out on valuable interest at the same time.

Better savings accounts

So, let’s take a look at how you can put that average float of spare cash to better use.

If you want to retain access to your savings, the top easy access savings account - NatWest e-Savings - is currently paying a market-leading rate of 2.89%. If you saved £2,590 in this account for a year, you would generate interest of almost £75. This may not sound like an earth shattering amount, but it’s certainly worth having compared with the zero return you would otherwise earn in a non-interest bearing current account.

The 2.89% rate also includes a 1.85% bonus which is fixed for 12 months, and guarantees a minimum return for that period. The account can be opened with just £1, and you’ll also get penalty-free instant access whenever you need it.

Meanwhile, the AA Internet Extra account is also offering a pretty competitive rate of 2.8%, including a 2.3% bonus for a year. Like the NatWest e-Savings account, you need just £1 to get started and you can make as many penalty-free withdrawals as you like.

Boost your return with an ISA

If you haven’t already used up your cash ISA allowance for this tax year, think about moving excess money from your current account into one of the best buys.

Right now, the most competitive account is the newly launched Santander Flexible ISA Issue 3 which pays a tax-free rate of 2.85%. The rate tracks the base rate for 12 months which means you’ll benefit from any rise in interest rates. But the return is also guaranteed not to drop below 2.85% during this period, securing a guaranteed minimum rate.

At Santander, you can earn an extra 0.2% with the Loyalty Flexible ISA taking the rate up to 3%. This applies where you have your primary current account with the bank - or you're prepared to switch - a mortgage or an investment product. This time the rate will track the base rate plus 2.5%.

Both Santander ISAs can be opened with £1 and offer penalty-free access.

Meanwhile, the Halifax ISA Direct Reward offers a decent tax-free rate of 2.8% on savings of £1 plus. Again, existing current account holders who pay in at least £1,000 a month - or those with a Halifax Ultimate Reward Current Account - will qualify for an extra 0.2% taking the rate up to 3%. In fact, you can boost your rate even further to 5.15% with the Halifax Reward Current Account. Find out how in Earn 5.15% on easy access savings.

Don’t forget, no matter which cash ISA you choose, the maximum deposit is £5,100 for the tax year which ends on 5 April.

Recent question on this topic

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Current accounts which are kind to your savings

Don't forget, not all current accounts pay dismal rates. In fact, there are one or two high interest options which are definitely worth further investigation. The Santander Preferred In Credit Rate account is still offering 5% fixed for a year on balances up to £2,500. Balances over £2,500 earn just 0.1%, so try to limit the amount you keep in the account to no more than that.

This means, by switching to Santander you could earn up to £125 on £2,500 of your spare cash over the next 12 months. On top of this return, you’ll also benefit from a fantastic switching bonus of £100. Just remember the rate will drop once the introductory period expires after a year. You’ll need to be prepared to move your spare cash to a more competitive account at this point.

To qualify for this top deal, you must pay in at least £1,000 a month and transfer over your direct debits.

Alternatively, if you don’t want to switch to Santander, you could go for the Lloyds Vantage current account instead. It pays a rate of 4% on balances between £5,000 and £7,000. Like the Santander deal you’ll need to credit the account with a minimum of £1,000 every month. But there’s no requirement to transfer your direct debits over, so you can keep your main current account with a bank elsewhere if you wish.

What’s more, Lloyds will allow you to open up to three separate accounts, enabling you to save a maximum of £21,000 and earn the highly competitive rate of 4% on all of it.

Compare savings accounts, current accounts and ISAs at lovemoney.com

More: Online versus in-branch savings accounts | 10 ways to beat rubbish savings rates