A basic rate taxpayer at 20% now needs to find a savings account paying at least 3.39% in order to stay ahead of inflation, according to our number-crunchers at MoneySupermarket. But, thanks to diminishing savings rates, this is proving nigh on impossible and, despite the hundreds of savings accounts on offer, only four meet these requirements.
These are AgriBank’s four and five-year bonds which pay annual equivalent rates (AER) of 3.50% and 3.60% respectively. But both deals require a deposit of at least £10,000 and AgriBank is not covered by the Financial Services Compensation Scheme (which means your money is not protected if it goes bust).
The First Direct Cash ISA at 3.00% and the Stafford Railway Building Society Cash ISA paying 2.75% also beat inflation as you earn interest tax-free – but you’ll need to drum up at least £40,000 to qualify for either account.
But rather than try to fit a square peg in a round hole, why not just find a new home for your money? These days, an increasing number of current accounts pay higher rates of interest then even the market leading savings deals – meaning a humble bank account could be your best bet. You’ll need to find the right one though, so we take a look at some of the options.
Smaller savings pots
Anyone with a savings pot of £2,500 or less can earn a competitive AER of 5.00% with the Nationwide FlexDirect Current Account for the first 12 months. Easily beating the rates on offer from most savings accounts, basic rate taxpayers maintaining a balance of £2,500 in this account over a year will earn total interest of £100.
To qualify for the 5.00% rate, you'll need to pay in at least £1,000 a month, and keep in mind that no interest is paid on any slice of a balance above £2,500. After the first 12 months, the interest rate falls to 1.00%.
You can read more about the FlexDirect Current Account here.
Medium savings pots
Those with a slightly larger savings pot of up to £5,000 can take advantage of the Lloyds TSB Vantage Current Account which offers tiered interest rates up to 3.00% AER. Balances of between £1 and £999.99 earn an AER of 1.50%, balances of between £1,000 and £2,999.99 receive 2.00% and balances of between £3,000 and £5,000 earn 3.00%. While the rates on offer are lower than you'll receive with the Nationwide FlexDirect current account, remember they don't expire after one year.
No interest is paid on any sum above £5,000 and you'll need to pay in at least £1,000 a month.
Larger savings pots
If your savings pot is an even larger £20,000, you'll be able to earn up to 3.00% AER with the Santander 123 current account. Again, rates are tiered and you’ll earn 1.00% on balances over £1,000, 2.00% on balances over £2,000 and 3.00% on balances between £3,000 and £20,000.
But the benefits don't end there because you will also receive cashback on some of your direct debits which leave the account. You will earn 1.00% cashback on your water bills, council tax bills and Santander mortgage payments, 2.00% cashback on your gas and electricity bills, and 3.00% cashback on your mobile phone, home phone, broadband and paid-for TV packages.
You must pay £500 or more into the account each month and pay a £2 monthly fee.
Current accounts that reward you
Some current accounts will offer cash rewards rather than paying interest. The aptly named Halifax Reward Current Account, for example, gives you £5 every month you pay in £750 and pay out at least two direct debits, providing you stay in credit. What's more, if you switch to the account before July 7, you'll receive £100.
Another account to offer new customers £100 in cash is the First Direct 1st Account. No interest is paid on balances, but those signing up to the account will have access to the First Direct Regular Saver Account which pays 6.00% AER for 12 months as long as you pay in £25 to £300 a month.
First Direct is also renowned for its excellent customer service, so if this is a priority, the 1st Account is a good option. In fact, if you are not happy with the account, you'll be given another £100 to leave.
You must pay £1,000 or more into the 1st Account each month or hold another First Direct product such as a mortgage or savings account (excluding the regular saver).
Switching to get easier
From September, the process of switching current accounts is to get easier and faster. Thanks to the Current Account Switch Service, switching current accounts will only take a maximum of seven working days, as opposed to 18 to 30 days. You can read more about this in my article.
But this shouldn't deter you from moving to a new current account before then. The switching process as it stands is relatively straightforward and waiting could mean missing out on some of the best deals.
Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.