With most savings rates barely worth bothering with, here's a way to earn 6.5% AER on your money, and still get instant access!
We're certainly living in strange times - after all, who could have predicted interest rates running so low, banks collapsing and the general misery we're currently experiencing?
I was asked at the weekend where the best place to save money is at the moment and had to admit that if you're after instant access to your cash, the choice is currently very poor. With the base rate currently running at just 1.5%, providers are slashing their rates left, right and centre - meaning measly savings rates for us. What's more, take into account inflation and you'll realise you could be effectively losing money.
In light of this it's probably time to start thinking a little differently about our money, and where to save it. And there is a place to stash that cash where it can earn up to 6.5% AER for a year and you'll still have immediate access. Yes, we could be seeing the rise of the current account.
Top Paying Current Accounts
| Provider | Account | Interest rate/AER | Minimum funds per month | Caveat |
|---|---|---|---|---|
| Alliance & Leicester (A&L) | Premier Direct Current Account | 6.5% for 12 months. 1% below Bank of England base rate thereafter. Balances over £2,500 earn 0.10% AER (variable). | £500 | Anyone who has held an A&L or Abbey current account in the past 3 months cannot apply. |
| Abbey | Current Account (Credit option) | 6% for 12 months | £1,000 | |
| Coventry BS | First | 2.6% (inc. first year bonus of 0.85%AER). Can save £1-£250k. | £1,000 |
Source: Moneyfacts
As you can see, the A&L account offers a whopping 6.5% AER on balances up to £2,500. And the best bit is this rate is fixed for a whole year. But for anyone with more to save, Coventry BS's First account offers 2.6% AER (including a bonus of 0.85% AER for the first year) on sums up to £250k.
Of course, using a current account for savings can be a recipe for disaster for anyone that's been used to saving and spending from separate accounts.
Potential issues:
1. Problems with transferring bank account - will direct debits get lost and end up costing us money?
Ask anyone that has switched current account in the past and they'll probably tell you of how at least one direct debit got lost, the mortgage was paid late, or payments from the wrong account racked up huge overdraft fees.
Fortunately, things should be a bit simpler these days. Most banks offer a dedicated transfer service and as long as you keep a sum of money in each current account for a month or two (just in case a direct debit leaves the wrong account) switching should be relatively smooth.
2. The high interest rate is often only paid for 12 months - is switching worth the trouble?
Well, normally I would say no, but with interest rates the way they are I am beginning to concede that some rates may be worth chasing. And if the rate the account drops to after the bonus period is no worse than the rate you're currently getting, you won't be any worse off.
3. You are limited to saving £2,500 with some accounts (anything above this earns a paltry interest rate).
Although this is total is perfectly reasonable to most, some of us may wish this limit was higher. But think carefully about how much money you really need immediate access to. Remember that any excess could be earning more in a fixed rate account (although it will be tied up) and that we should all make the most of our Cash ISA allowances (currently £3,600 can be saved, annually, tax free).
4. I'll spend more as my savings and spending money will be mixed up.
This is a real worry for many. Indeed, when current account mortgages were first introduced many of us shunned them for exactly this reason - our heads couldn't cope with seeing savings and mortgage debt in the same total (they became much more popular when the sums could be separated into different "accounts").
One way to tackle this problem is to try and round off your savings to an easy sum (say £1,000) that is easily subtract-able, so you can work out at a glance how much money you have to spend. Or set up a spreadsheet that you can plug your total into and regularly see how much you have.
Some people even try only moving their salary to the new account, leaving the direct debits with the old one. By timing it right they then simply transfer over what's needed to pay the debits each month from the new account (effectively keeping it for savings).
Or you may just find your mental arithmetic improves hugely.
Fancy £100 For Free?
On a slightly different note, if you like the idea of simply being rewarded for changing current account you are in luck, as you can be paid anything up to £100 for switching. But as with everything, always read the small print first.
Alliance & Leicester's Premier Current Account
Open an Alliance & Leicester Premier Current account and although you won't earn the 6.5%AER that our friends with the Premier Direct account are getting (as mentioned previously) you will instead get free annual European travel insurance, plus £100 for your trouble.
Over 50s
If you're over-50, A&L's Premier 50 account offers the chance to earn 6.5% on balances up to £2,500 (0.1% on anything over this) for 12 months (after which it will revert to the Base Rate, less 1%). You'll also get some benefits, such as worldwide annual travel insurance, plus £100 for your trouble.
However, there is a major caveat with this account as it isn't free - it's a packaged account that costs £10 a month to run (so the free £100 in this case is effectively paying your first ten banking instalments).
As with all packaged accounts, check it out carefully before signing up, especially regarding whether or not you'd use the benefits. Could you get a similar account and pay for your own travel insurance etc. for less than £120 a year?
First Direct
First Direct also offers £100 to anyone opening its 1st account and crediting it with at least £1,500 per month, but you do need to be a new customer to the bank. You should also be aware that the 1st account pays no interest at all on in-credit balances, and you'll be charged a £10 monthly fee if you either fail to make your monthly credit, or take out a First Direct product, such as insurance or a mortgage.
£100 for leaving!
And interestingly, should you decide this account is not for you (and provided you have made at least six month's worth of payments) First Direct will give you £100 to help you move to another bank!
Of course, First Direct is offering this deal in the hope that no one will want to go through the hassle of switching current account again. But as it has no monthly fee, there's nothing stopping someone from opening an account, arranging for their salary to go in and then simply transferring the funds out again as quickly as possible (and snaffling the £100).
Whatever your thoughts are regarding the best home for your savings, one thing is for sure, we shouldn't rule anything out. And while a year ago I personally would have thought stashing cash in a current account would have been far more hassle than it's worth, I'm having to concede that if you want to earn a decent rate and still have instant access, there are worse places it could be.