At first glance, an 8 percent savings rate seems like the answer to many savers’ dreams, something that was unimaginable just a year ago.
The most eye-catching rate on the market at the moment is the 8 per cent offered by Nationwide’s latest regular saver, which was announced last week.
But there is something curious about the sudden increase in the habitual saver, as well as the interest of the big banks in promoting operations.
This is especially strange when you look at the facts about how underused regular savings offers really are.
Tempting Prospect: Regular Savings Rates Seem Unbeatable, But Not Everything Is What It Seems
In fact, despite all the interest rates, there is actually less cash in the hands of regular savers now than there was a year ago, according to analysis of Caci data by Paragon Bank: £20.7 billion now compared to £21.1 billion in 2022.
Meanwhile, there is a huge £528.1bn in easy access accounts, £258bn in fixed-term accounts and £118bn in premium domestic savings and investment bonds.
But if you look at the way banks promote regular savers, you’d think they were the most popular savings product in the UK. So what is going on?
Not only can regular savers pay less interest than consumers think, but I think the big banks are cynically using the deals to encourage customers to open checking accounts and deflect criticism about low savings rates elsewhere. .
Habitual savers have deep roots
You could be forgiven for not being familiar with regular savers, which historically haven’t been a very popular choice.
Regular savers allow you to pay a limited amount each month, usually 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 some of that money before the end of the term.
For years, regular savers were the domain of smaller building societies, with deals usually made by people on lower incomes.
Many were a direct replacement for the “savings clubs” of years past, where Britons contributed a small amount each month to be able to afford something in a year, often over the expensive Christmas period.
Some building societies still brand their regular savers as ‘Christmas’ or ‘holiday’ for precisely this reason.
Then something happened and the number of regular savers skyrocketed. The catalyst was the start of successive increases in the Bank of England’s base rate.
In response, savings interest levels emerged from the stagnation in which they remained for many years. And none have risen more than regular savers, who now beat all other savings offers when it comes to rates.
There are now 71 regular savers in the market, up 25 per cent from 57 in November 2021, the month before the base rate began to rise, according to financial experts Moneyfacts.
Nationwide’s newest regular saver pays 8 per cent. Even the second best regular saver, First Direct, pays 7 per cent, followed by Lloyds Bank at 6.25 per cent.
All three deals have much higher interest rates 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 option for many savers, and I have one too.
But what I question is the big banks’ sudden interest in launching regular, flashy savers when for years they were largely the domain of smaller building societies.
Assuming you took out the Nationwide deal above, then paid a maximum of £200 each 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 interest rates for regular savers to avoid political criticism over low easy access rates
You can see where I’m going with this: £104 isn’t 8 per cent of £2,400, it’s 4.33 per cent.
Of course, 4.33 percent is still a very decent interest rate. But savers could get much more by investing the same amount in the leading easy-access deal, Leeds Building Society’s, which pays 5.1 per cent.
That deal would give the same saver £122 in interest (17 per cent more than Nationwide) and also with greater flexibility as they are not penalized for withdrawing money.
Easy access offers are also generally much easier to set up and run than regular savers, as there are fewer strings attached and you don’t need to get a checking account at the bank in order to take one out.
The reason regular savers effectively pay less than the general interest rate is that you only earn a fraction of that rate each month when you complete regular savings.
There is only one month of the year when you earn full interest on your savings.
Of course, all of this is explained in the fine print of the savings offers. But I’m not convinced that many savers will read this literature and then be sorely disappointed when they realize they’ve committed to a year-long deal that pays them less than they expected.
And that one-year commitment is important, because if you withdraw money from a regular saver, you’ll typically lose that overall interest rate, or the deal will be done, as is the case with First Direct, for example.
The case of the banks
Banks will defend the sudden rise of regular savers by saying Britons have a poor record of saving money and they want to help.
Banks maintain that a regular savings account helps encourage the habit of saving.
I could not agree more. But let’s be honest, getting more people to save isn’t really the reason the big banks are now offering seemingly decent rates on these deals.
If banks really cared about encouraging the habit of saving, why did the rise of regular offers for savers only occur when interest rates began to rise?
If banks really cared about encouraging the savings habit, why did the current boom in regular savings offers only occur when interest rates began to rise? Where were the usual savings offers from the big banks when interest rates were low and Brits were clamoring for decent savings products?
Until the Bank of England started raising base rates, regular savings offers were some of the least sought after and least promoted on the market.
But by offering seemingly high regular rates to savers, banks have managed to deflect criticism from MPs over their low, easy-access rates earlier this year.
The big banks’ easy access rates tend to be between 1.5 and 3 per cent, and Nationwide has an unusually high rate of 4.25 per cent on one of its offers.
The advantage of a regular saver for banks is that customers are unlikely to withdraw their money during the term.
That rigidity is a boon for banks, as it gives them certainty that the cash deposited with regular savers will remain there for a certain time. In that time, banks can leverage the cash to invest elsewhere, which is harder to do with more flexible arrangements such as easy-access accounts.
Let’s not forget either that to hire a normal saver it is necessary to open a checking account in that bank, with one or two exceptions.
This gives banks access to another valuable resource: your data. From your spending habits, a bank can calculate an incredible amount about you and use it to sell you loans and other financial deals.
So if you’re tempted by the high rates of regular savers, I don’t blame you, and deals have their place.
But the seemingly high rates on big banks’ regular savings deals cannot, and should not, replace the rates on the savings products that consumers use in much larger quantities: easy-access accounts.
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