Why some current accounts beat top savings accounts

Most savings accounts seem redundant when you consider what current accounts from the likes of TSB, Nationwide and Santander can offer.

It really isn't a good time for anyone looking to stash money in a savings account.

Last month it was revealed that some savings accounts were offering rates as low as 0%. Read more in: FCA reveals UK's worst savings accounts.

The rates on offer are miserly overall, and any half-decent best buy account that does come along is quickly withdrawn when more than a few eager savers get wind of them.

It’s a sorry state of affairs.

Who’s to blame?

The record low Base Rate – which has been stuck at 0.5% for over seven years now – is a key reason saving rates are so low.

With the UK trying to handle the economic impact of Brexit the Base Rate is anticipated to fall further to 0.25%, which will mean more bad news for savers.  

A fall in the Base Rate will make it even cheaper for banks to borrow which means they have less need for savers’ deposits.

The idea behind cutting the Base Rate is to encourage more borrowing and spending and less saving, so the returns on savings accounts are unlikely to recover any time soon.

Time for new ideas

However, even though the banks aren’t desperate for our saving pots they are keen on gaining more current account customers, particularly since the launch of the seven-day current account switch back in September 2013.

And oddly that’s where savers can cash in.

At the moment there are a number of current accounts all paying healthy levels of credit interest and the introduction of the Personal Savings Allowance (PSA) on 6 April 2016 has made them even more attractive.

The new rules mean basic rate taxpayers are now able to earn up to £1,000 in savings interest without attracting any tax at all, while higher rate taxpayers will be able to earn £500. There is no PSA for additional rate taxpayers.

What’s on offer?

The Nationwide FlexDirect Account pays a top return of 5% on balances up to £2,500 for 12 months. After that, the rate falls to 1%. The account also comes with a 12-month fee-free overdraft and access to ‘Flexclusive’ deals on mortgages, savings, loans and credit cards. You need to pay in £1,000 a month to benefit from the features though.

The TSB Classic Plus Account also offers a top rate of 5% but only on balances up to £2,000. However, the rate won’t fall away after 12 months and you only need to pay in £500 a month and register for paperless statements to qualify for interest.

Lloyds Bank offers tiered interest rates on its Club Lloyds Current Account, with the top bracket paying 4% on balances from £4,000 up to £5,000. The account also comes with the choice of one lifestyle benefit each year. In order to earn interest, you need to set up two direct debits on the account and there’s a £5 monthly fee unless you pay in £1,500 a month.

The Santander 123 Current Account also pays tiered interest rates and is great for bigger balances. You can get 1% on balances from £1,000, 2% on balances from £2,000 and 3% on balances from £3,000 up to £20,000. The account also offers up to 3% cashback on direct debits. The account needs to be funded with £500 a month and have at least two direct debits set up in order to earn interest and cashback. It also attracts a £5 monthly fee.

The Tesco Bank Current Account offers 3% interest on balances up to £3,000. You can also earn one Clubcard point for every £4 you spend in Tesco and one for every £8 spent elsewhere on your debit card.

Elsewhere, Bank of Scotland offers those who add Vantage to their Classic Current Account the chance to earn 3% interest on balances from £3,000 up to £5,000. Vantage is free but it means you must deposit £1,000 each month and stay in credit to earn the interest.

But can these accounts really compete with what’s on offer in the savings world?

Current accounts vs. savings accounts

In the table below we have picked out the market-leading products for easy access, Cash ISAs and fixed rate savings accounts to see how the current accounts stack up.

The introduction of the PSA means providers no longer have to tax savings at source and interest is now normally paid gross. So we’ve arranged the table by the top headline rates. Bear in mind that if you’ve exceeded your PSA for the year you will be taxed on savings interest at your marginal rate of Income Tax.

*Account charges a £5 monthly fee

**Anticipated profit rate

***Money protected by French deposit scheme the FDGR

As you can see the Nationwide FlexDirect and the TSB Classic Plus current accounts are currently top of the savings market offering a rate of 5%, followed by the Lloyds Bank Club Lloyds Current Account which offers a rate of 4%. These three accounts beat the top five-year fixed rate bond and Cash ISA and offer unlimited access to your cash.

However, you can only earn the top returns on limited balances (up to £2,500 with Nationwide, £2,000 with TSB and from £4,000 up to £5,000 with Lloyds Bank). That's great for new savers but not a lot of use to those who have a lot stashed away already.

For larger balances there’s the Santander 123 Current Account. It also offers a rate better than a five-year fixed rate Cash ISA or bond and unlimited access to your cash. Plus, unlike Nationwide, TSB and Lloyds, you can save more as the 3% rate applies to balances from £3,000 up to £20,000.

However, you will need to factor in the £5 monthly fee the account attracts to make sure you're getting the best deal.

Verdict

If you’re chasing the best return for your cash considering a current account instead of or as well as a savings account makes a lot of sense at the moment.

The evidence seems to be stacked against easy access saving accounts, Cash ISAs and fixed rate bonds. Current accounts pay more, come with other perks and provide easy access to your pot.

Could your savings be better off in a current account? Let us know in the Comments box below.

Compare current accounts

This article has been updated since its original publication

More on savings and ISAs:

The best Cash ISAs

The top fixed rate savings bonds

The best instant access savings accounts