We compare the new savings account from Santander that pays interest up front with the competition.
Santander is paying you your interest up front with its new Upfront Interest savings account, which ties your money in for three years and pays you a rate of 3.36% AER for the privilege. This is not a market-leading interest rate but the fact that you get the interest rate upfront could give it a competitive edge other accounts don’t have.
So is it worth getting?
At 3.36% AER for three years, a basic-rate taxpayer will get about £830 up front for every £10,000 put into the account. A higher-rate payer will get around £200 less, and non-tax payers will get about £200 more.
Upfront interest gives us two possibilities. You can spend the money, although bear in mind that your savings will be devalued at a particularly rapid speed by inflation. Alternatively, you can re-save the interest in another account to reduce the damage of inflation to your existing wealth.
What are the catches?
You must open or already hold a Santander current account to qualify, and no interest is earned before the term start date. For accounts opened by 20th November, the term starts on the 1st December. For accounts opened between the 21 November and 20th December, the term starts on the 2nd January, and so on.
Reinvesting the upfront interest
Call me optimistic, but I'm going to assume that many readers will be saving the interest they get rather than blowing it immediately.
You could tie your £830 into a top, three-year fixed-rate savings account. The best I can find are the AA's Postal Account paying 4.15% per year, and Halifax's Fixed Online Saver account paying marginally less at 4.1%. Also worth noting in the three-year savings category is Investec's Base Rate Plus account, paying the base rate plus 3.25 percentage points for three years.
With the AA or Halifax accounts, a basic-rate taxpayer will earn about £90 extra, a higher-rate payer about £20 less and a non-tax payer about £20 more. This means a basic-rate taxpayer will have made a total of about £920 from both the Santander account and from reinvesting the upfront interest.
However, if you had merely put the entire £10,000 into the Halifax account, you would have got more than £1,000. So you’re £80 worse off by going for the upfront interest bond, rather than a straightforward saving account with a higher interest rate.
Another alternative is to invest the £830 in the Santander Preferred Current Account. Remember, you must open a Santander current account to qualify for the Upfront Interest savings account anyway. The account pays 5% AER fixed on balances up to £2,500 for 12 months, which is the best easy-access rate presently available in either savings accounts or current accounts.
You have to pay in £1,000 a month and switch over all your direct debits. You'd also have to move the money to a better savings product again in 12 months time, since the interest plummets from that point. However, if you're prepared to go through the hassle of this, you should be able to get around the same amount as if you invested in the AA or Halifax account, or more if interest rates rise in that time. The advantage to all this palaver is that part of your big savings pot stays flexible.
Spending the money
Instead of investing, it could make sense to take the £830 upfront interest and spend it, rather than resave it. If you'll use it to pay for a course now that will increase your income next year, for example. Or if you use it to buy something that you know will rise very rapidly in price over the next few years.
But is the account still our best option for that? The answer is no.
If you take your initial £10,000 of savings and spend £830, and then invest what's left in the Halifax account instead of Santander's, you'll still earn more than £930 in interest. So you'll have bought what you wanted straight away from your existing savings and, after three years, you'll still have more than you'd have got from Santander, by about £100.
The additional advantage to this strategy is that in a dire emergency you can close the Halifax account and take your money back early. You have to pay a penalty, but this is flexibility you don't get with Santander, unless an account holder dies.
Saving is about preserving wealth
The trouble with gimmick accounts is they tend to be unique, which means there is no competition driving better deals. If all banks offered interest up front, it would be easier to see which was best and those of shopping around regularly would get a better price.
To choose an account, consider: What do you save for? The answer will normally be for emergencies, for the future, and to preserve our wealth against inflation. These goals are usually easy to satisfy.
For the most part, it makes sense for us to keep a pot of emergency funds in an easy-access account at all times.
With any excess savings, we should also keep them flexible in an easy-access account until we see the special deals that genuinely are worth tying our money up for several years for. These are accounts that are guaranteed to beat inflation, as measured by the Retail Prices Index, even after tax is deducted.
Such accounts have been available for most of the past 30 years. Even when National Savings and Investments stopped offering its inflation-linked certificates, other banks and building societies have stepped into the breach with special cash ISAs, for example.
If you don't know, cash ISAs are savings accounts where you get paid the full interest by the bank: it doesn't deduct 20% automatically and you don't have to declare it on your tax returns. So keep an eye out for when inflation-linked deals show up.
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