Regular savings accounts: why 7% does not mean 7% on your money
Regular savers advertise the highest rates around, but the cash you earn is often half what you expect. How they work and how to run a few
Regular savings accounts carry the highest headline rates on the market, often well above easy-access accounts. But the way they work means the cash you actually earn is much smaller than the rate suggests. This guide explains the maths, how to feed one from an easy-access account, and how to run several at once.
How a regular saver works
You commit to paying in a set amount every month, up to a limit, for a fixed period, usually 12 months. In return the bank pays a rate well above its easy-access accounts. Many limit withdrawals during the term, and some are only open to current account customers.
The catch is in the maths. Your first payment earns interest for 12 months. Your second earns for 11. Your last earns for one. On average, the money is in the account for about six and a half months.
Why the headline overstates your return
Suppose a regular saver pays 7% and lets you pay in £250 a month. Over the year you deposit £3,000. Many people expect £210 in interest. The real figure is around £110, because the average balance over the year is about £1,625, not £3,000.
| Monthly payment | Total paid in | Interest at 7% (approx) |
|---|---|---|
| £100 | £1,200 | £45 |
| £250 | £3,000 | £110 |
| £300 | £3,600 | £135 |
The 7% is still genuine. Every pound in the account earns 7% for as long as it is there. It just cannot all be there for the full year. Compared with an easy-access account paying 4.5%, the same £250 a month would earn about £70, so the regular saver still comes out ahead by around £40.
Drip-feeding from easy access
The standard approach is to keep your lump sum in the best easy-access account you can find, then set up a standing order into the regular saver on the day after payday.
- Put the lump sum in an easy-access account paying around 4.5% to 5% AER. Check a comparison site for today's rates.
- Open the regular saver and set a monthly standing order for the maximum allowed.
- Let the easy-access balance fall each month as the regular saver rises.
Both pots earn a good rate at every point. This beats leaving the money in a current account paying nothing while you feed the regular saver.
Running several at once
There is nothing to stop you holding regular savers with several banks. If each allows £250 a month and you can afford £750 a month, three accounts triple your gain. Points to note:
- Some require a current account with that bank. Opening one involves a credit search, so do not open several in a short period if you plan to apply for a mortgage.
- Track the start and end dates. Most mature after 12 months and drop to a poor rate. Set a reminder to move the money out and open a fresh one.
- Missed payments can cost you the rate or close the account. Automate with standing orders.
- Interest from all of them counts towards your Personal Savings Allowance of £1,000 (basic rate) or £500 (higher rate).
Where regular savers fit
They suit people who save from monthly income rather than a lump sum, and people who want to squeeze extra from money already sitting in easy access. They do not suit anyone who needs the flexibility to stop paying in or withdraw, or anyone whose main problem is a lump sum that needs a home. For a lump sum, a fixed-rate bond paying around 4.5% to 5.25% or a cash ISA usually earns more in cash terms.
Watch out for
- Accounts that pay the high rate only if you make every payment and no withdrawals.
- A low rate on maturity. The money often rolls into an account paying under 2%.
- Rates that apply only up to a balance cap.
- Confusing the headline with your return. Work out the cash figure before deciding whether the effort is worth it.