At first glance, an 8 per cent savings rate seems like the answer to many savers’ dreams, and something that was unimaginable just one year ago.
The flashiest rate on the market at the moment is the 8 per cent on offer from Nationwide’s latest regular saver, which was announced last week.
But there is something curious about the sudden rise of the regular saver, as well as the interest in promoting the deals by big banks.
This is especially odd when you look at the facts about how little-used regular saver deals really are.
Tempting prospect: Regular saver rates look unbeatable, but all is not what it seems
In fact, despite all the grabby rates there is actually less cash held in regular savers now than there was a year ago, according to analysis of Caci data by Paragon Bank – £20.7billion now compared to £21.1billion in 2022.
Meanwhile, there is a massive £528.1billion in easy access accounts, £258billion in fixed-term accounts, and £118billion in National Savings and Investments Premium Bonds.
But to look at the way banks are promoting regular savers, you’d think they were the most popular savings product in the UK. So what’s going on?
Not only can regular savers pay less interest than consumers think, I believe the deals are being used cynically by big banks to encourage customers to open current accounts – and to deflect criticism of low savings rates elsewhere.
Regular savers have deep roots
You could be forgiven for being unfamiliar with regular savers, which historically have not been a very popular option.
Regular savers let you pay in a limited amount every month, normally no more than £500 but sometimes as little as £150. In exchange, after a year you will get all the money back, plus interest.
There is often an interest penalty if you withdraw any of that money before the term is up.
For years, regular savers were the domain of smaller building societies, with the deals normally taken out by people on lower incomes.
Many were a direct replacement for the ‘savings clubs’ of years gone by, where Britons would chip in a small amount every month in order to be able to afford something in a year’s time – often the expensive Christmas period.
Some building societies still brand their regular savers as ‘Christmas’ or ‘festive’ for precisely this reason.
Then something happened, and the number of regular savers exploded. The catalyst was the start of successive hikes to the Bank of England base rate.
In response, savings interest levels rose out of the doldrums where they remained for many years. And none have risen higher than regular savers, which now outgun all other savings deals when it comes to rates.
There are now 71 regular savers on the market, up 25 per cent from 57 in November 2021, the month before base rate started to rise, according to financial experts Moneyfacts.
Nationwide’s newest regular saver pays 8 per cent. Even the second-best regular saver, from First Direct, pays 7 per cent, with Lloyds Bank in hot pursuit with 6.25 per cent.
All three deals have interest rates far higher than savers can get elsewhere.
By contrast, the best easy access deal, from Leeds Building Society, pays 5.1 per cent, and the best one-year bond pays 6.2 per cent, from National Savings & Investments.
Now, I think regular savers are a great choice for many savers – and I have one myself.
But what I question is big banks’ sudden interest in launching flashy regular savers when for years they were mostly the domain of smaller building societies.
Assuming you took out the Nationwide deal above, then paid in the maximum of £200 every month and never took any money out, at the end of the year you would have earned £104 in interest, on £2,400 saved.
Playing politics: Banks have successfully used high regular saver rates to stave off political criticism of low easy access rates
You can see where I’m going with this – £104 is not 8 per cent of £2,400, it is 4.33 per cent.
Of course, 4.33 per cent is still a very decent interest rate. But savers could get far more putting the same amount into the top easy access deal, from Leeds Building Society, which pays 5.1 per cent.
That deal would earn the same saver £122 in interest – 17 per cent more than Nationwide – and with greater flexibility too, as you are not punished for taking money out.
Easy access deals are, by and large, also much easier to set up and run than regular savers, as there are fewer strings attached and you are not required to get a current account with the bank in order to take one out.
The reason regular savers effectively pay less than the headline interest rate is that you only earn a fraction of that rate every month, when you top the regular saver up.
There is only one month of the year in which you get the full interest on your savings.
Of course, all of this is explained in the fine print of savings deals. But I am unconvinced that many savers read this literature, and are then sorely disappointed when they realise they have committed to a year-long deal that pays less than they expect.
And that year-long commitment is important, as if you take any money out of a regular saver you will normally lose that headline interest rate – or the deal will close, as is the case with First Direct’s, for example.
The banks’ case
Banks will defend the sudden boom in regular savers by saying Britons have a bad track record of putting money away, and they want to help.
A regular saver account, banks argue, helps by encouraging a habit of saving.
I couldn’t agree more. But, let’s be honest, getting more people to save isn’t really why large banks are now offering seemingly decent rates on these deals.
If banks really cared about encouraging a savings habit, why has the boom in regular saver deals only happened when interest rates started to rise?
If banks really cared about encouraging a savings habit, why has the current boom in regular saver deals only happened when interest rates started to rise? Where were big bank regular saver deals when interest rates were low and Britons were crying out for decent savings products?
Until the Bank of England started making base rate hikes, regular saver deals were some of the least-requested and least-promoted savings deals on the market.
But, by offering seemingly high regular saver rates, banks have successfully deflected criticism of their poor easy access rates by MPs earlier this year.
Big bank easy access rates tend to hover around 1.5 to 3 per cent, with Nationwide having an unusually high 4.25 per cent rate on one of its deals.
The advantage of a regular saver to banks is that customers are unlikely to take their money out during the term.
That rigidity is a blessing for banks, as it gives certainty that the cash deposited in regular savers will stay there for a set time. In that time, the banks can leverage the cash to invest elsewhere, which is harder to do with more flexible deals, like easy access accounts.
Let’s also not forget that to take out a regular saver, you need to take out a current account with that bank – with one or two exceptions.
That then gives banks access to another valuable resource – your data. From your spending habits, a bank can work out an incredible amount about you and use it to sell you loans and other financial deals.
So if you are tempted by the high rates on regular savers, I don’t blame you – and the deals have their place.
But seemingly high rates on big bank regular saver deals cannot, and should not, take the place of rates on the savings products that consumers use in far greater numbers – easy access accounts.