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What is a regular savings account and how does it work?

Regular savings accounts offer some of the best interest rates around. Here we look at whether this type of account is right for you.

 

by Victoria Bischoff on Aug 02, 2012 at 12:11

What is a regular savings account and how does it work?

Regular savings accounts offer some of the best interest rates for cash savers.

But how exactly does a regular savings account work, and what do you need to watch out for?

What is a regular savings account?

As the name suggests, a regular savings account requires you to commit to putting aside a small amount of money each month.

In return for guaranteeing a set level of income to your savings provider each month, they will usually pay you a higher interest rate than if you invest a lump sum in a cash ISA or easy access account, for example. In fact, the best regular savings rates often beat the rates offered on the lengthier fixed-rate deals.

However, this type of account does have strict terms and conditions which, if you fail to adhere to them, could cause you to lose your competitive rate.  

Are the interest rates as good as they sound?

Regular savings accounts advertise some of the best rates around.

It’s not unusual to see headline rates of anything up to 8%, which, when you consider that the best easy access accounts currently offer around 3%, is a pretty tempting deal for savers struggling to protect their money from inflation.

However, it’s important for savers to understand exactly how the interest rate on regular savings accounts is calculated, as many people end up disappointed when they receive a smaller interest pay-out than they were expecting.  

Take ‘Bob’ for example. Over 12 months Bob has put £2,400 into his regular savings account paying 10%.

On this basis, you might assume that at the end of the year they will have earned £240 in interest. Bob, however, knows better.

He knows that because he built up his £2,400 savings over the course of a year, he actually only earned 10% on £2,400 in month 12. In month one, for example, he only earned 10% on the £200 he had contributed so far. In the second month he earned 10% on £400 and so on.

So if Bob’s average balance over the year is roughly around £1,200 he should net about £120 in interest.

What’s more, as Bob is a basic-rate taxpayer he has to pay 20% tax on his £120 interest, which means in the end he only gets £96. Higher-rate taxpayers paying 40% tax, meanwhile, will only get £72.

For those who are excellent at managing their money, it is also worth pointing out the 'drip-feeding' technique. This involves depositing a lump sum of cash into an easy access account and then moving small amounts across to your regular savings account each month. This way you can benefit from both interest rates. To see how much you could earn by doing this check out Moneysavingexpert's online calculator.

What happens if I miss a payment?

Regular savings accounts have several strict rules, and not missing any of your monthly payments is almost always one of them. Miss one and you might find your competitive 8% rate is pulled and drops to 1%.

There are some providers that allow savers to skip one or two payments during the year, but make sure you double check the small print to avoid losing out.

What other rules do I need to know about?

There is usually a limit on how much you can save per month. A provider might say, for example, that you must save between £50 and £250 to qualify for the headline interest rate. Fail to save enough or save too much and you could find your provider penalises you by docking your interest payment. Some allow you to roll over any monthly allowance you don’t use to the next month, but double check before assuming anything.

Most regular savings accounts providers also limit your access to your cash and will slash your interest rate if you make any withdrawals. There are some providers, however, that allow you to make one or two withdrawals during the term of the account so it is worth checking each the individual provider. Although, remember, the more withdrawals you make the less interest you’ll earn, so if you think you might need to access your cash in emergency this may not be the account for you.

Savers should also be aware that most regular savings deals only last for a year. Once the 12 months is up your provider will usually move your money into a current account or low paying savings account so it’s important you set yourself a reminder to look for a new deal towards the end of the year.

It’s also worth pointing out that in order to get your hands on the most competitive regular savings accounts you often also need to have a current account with that provider. And although switching current accounts isn’t difficult, it’s best to do a little research first to ensure this is the provider you want to handle your money on a day to day basis.  

Is this account right for me?

Regular savings accounts are useful for people saving for towards a short-term goal like a holiday or wedding, for example. They will also help get you into the habit of saving regularly.

However, if you doubt that you’ll be disciplined enough to save every month or have an irregular income, you might be better off opting for an easy access account which won’t penalise you if you miss a payment or need to make a withdrawal.

Those who want to deposit a large lump sum of cash, meanwhile, should also steer clear of these accounts, while anyone who feels able to lock their cash away for more than a year should consider a fixed rate deal.

Finally, anyone who has not yet used up their tax-free cash ISA allowance for the year – currently £5,640 – should ensure they do this first. You might be offered a lower interest rate, but as you do not have to pay any tax on the interest you do make you are actually likely to earn a better return.

You can learn more about how the different types of savings accounts work in our guides ‘What is an ISA and how do I get one', 'The ISA explained once and for all' and 'How to pick the best savings account'.

How safe is my money?

Under the Financial Services Compensation Scheme (FSCS) deposits up to £85,000 per individual per institution are protected.

This means that if you save £100,000 in one single financial institution and the bank collapses, you are only guaranteed to get some of your money back. If you split your £100,000 between two separate banks, however, all of your money will be protected.

Be aware that many of the high street’s biggest banks share the same Financial Services Authority (FSA) registration, and therefore count as a single financial institution – HSBC and First Direct for example. This means that under FSCS rules only £85,000 of your money in both banks combined will be protected. If in doubt call the FSA’s consumer helpline on 0845 606 1234.

4 comments so far. Why not have your say?

derek farman

Aug 02, 2012 at 16:03

Well done Victoria ..... I spotted this over a year ago that the advertised high rates are a swizz. In fact I advised a pal to avoid it when he was taken in by it.

It was completely wrong to advertise rates of 8% - 10%, because the smart arses who designed these accounts realised that most people would not do the maths to expose this mis-information.

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A Sick SIPP Owner

Aug 02, 2012 at 16:21

Basically, the accounts are worth considering - after (or as part) of your years ISA savings (20% tax relief on 12 lots of £250 per month @ 3% pa = £9 of the £45 gross) and if you cannot keep the money as savings, then at least you will save that bit of tax, or the bother and wait of getting a refund of the tax paid.

ust pick a suitable account with appropriate interest, and where the conditions match your expectations, and you can at least close the account - taking all your money out without penalty, or loss of interest.

(watch out for the 1 withdrawal without penalty allowed accounts - closing the account later may be considered to be a second withdrawal.

And - there are almost all a 12 month 'thing' so after payment 12 look for somewhere else to put the money

Then again - you may be better off using a Christmas savings club, or perhaps using the regular saver until ner Xmas, and then transferring the money to a Xmas club.

It's simply a matter of reading the terms, and considering them against your expected lifestyle and possible calamities.

If you have a small amount of savable cash - consider such things as

Car insurance - If you can get a cheaper deal paying annually, and can take the risk of paying for the year, then regular saving for next year's premium

Use a cash-back credit card to pay the premium, then use the savings to pay the credit card bill - time that right, and yhat may be almost another month's interest!

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derek farman

Aug 02, 2012 at 17:01

An ARMINVESTORS.COM .....disagree . Any organisation which uses sneaky , bamboozling information to catch an investor would immediately be off my list forever.

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A Sick SIPP Owner

Aug 02, 2012 at 17:19

Derek,

An interesting, and frequently appropriate attitude.

However many of the offerings are well and clearly detailed, and if offered a good rate, then why not take it.

But firstly - always consider your needs and then the actual commitment you are making, including any penalties.

Due to the way my finances work, I have several running as, with the year's bonus rate' those I use pay more than most other uses of my 'for later use' cash would get, or save me, and are almost instant access.

Then again, those that do use sneeky, bamboozling documentation and terms would not be my first choice - unless I really understood the actual terms and conditions, and they were offering an appropriate rate and security to justify lending them my cash.

And - as always instant access even if I have to close the account is a key consideration.

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