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Current account or savings - which is best?

Current account or savings - which is best?

Category: Savings

Updated: 07/11/2014
First Published: 07/11/2014

MONEYFACTS ARCHIVE
This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

Savings accounts have traditionally been thought of as the sensible place to stash your cash in order to generate a real return, but after years of falling interest rates, that's no longer the case. A lot of savvy savers have been looking for alternatives, and high interest current accounts have become a very real possibility – but would they be right for you? Lets take a look at both current accounts and savings accounts in turn.

Current accounts

High interest current accounts have repeatedly hit the headlines over the last few months and are growing in popularity, with a whole raft of new products joining the sector. And they're popular for a reason – they boast in-credit interest rates of as much as 5%, far more than you could get from a traditional savings account, making them a viable alternative in a world of lacklustre savings products.

However, they come with caveats. Providers aren't going to give you such healthy returns and expect nothing back, so many of these accounts come with opening restrictions and minimum monthly funding requirements, so you'll need to weigh these up carefully.

Most will only pay the headline interest rate up to a specified balance, and often only for a set period of time, so it's important to remember the pros and cons. That said, with the average interest rate for a no notice account being a meagre 0.68%, even putting a portion of your savings into a high interest current account could be more than worth it.

Savings accounts

Savings accounts have, unfortunately, fallen out of favour with savers, many of whom have become disillusioned with the low rates on offer. However, that's not to say they should be overlooked. ISAs should always be considered for the simple reason that they give tax-free returns, and let's not forget that you can often get better rates if you're willing to lock your money away for a bit longer.

Then there's the fact that you can save a lot more in traditional savings accounts. Most won't have the low limits of high interest current accounts, meaning anyone who's got substantial savings will of course need to opt for a traditional saver. Then there's the possibility of stocks & shares ISAs – these come with more risk but have the potential for better returns, so this kind of savings vehicle may be worth considering.

Points to remember

  • When looking at high interest current accounts, bear in mind any restrictions or conditions on you receiving the headline rate. You'll often be required to use it as your main bank account with direct debits linked to it, and you'll usually need to pay in a minimum amount each month in order to qualify. Others only offer the highest rate of interest on amounts above or below a certain level, and the deals may only be available for a set period of time.
  • See how many accounts you can open, either individually or with a partner. TSB's Classic Plus, for example, lets you have two accounts yourself and a joint account, so theoretically, you could have six accounts per couple – meaning you could save significantly more.
  • Most savings accounts offer better rates if you keep your money locked away for longer, so if you're willing to have limited access, there's often the chance to earn decent returns on balances well above those applicable for current account interest.

Mix and match

For a lot of people, the best option would be to go for a combination of the two. Savers that are looking to generate the best returns on their money would do well to consider some of the high-interest current accounts around, at least for a portion of their savings – you could put £2,000 into a high interest account and top it up with your income to meet the deposit requirements, and all other savings could go elsewhere.

Despite the paltry rates, other savings vehicles shouldn't be overlooked. A traditional savings account could be ideal for those that like to keep their savings and everyday cash separate, and if you've got a substantial amount to invest or are willing to tie your money up then a fixed rate bond would be perfect. Those that want to generate an income from their savings may like to opt for monthly interest accounts, and then there are ISAs, a tax-free vehicle that even those lured in by alternatives would be wise to benefit from.

The best of the bunch

Below are a few of the best high interest current accounts and top-rated savings accounts to help you decide which combination you want to go for.

HIGH INTEREST CURRENT ACCOUNTS


TSB Classic Plus
5.00% AER
  • Monthly funding of £500 required
  • 5% interest paid on balances up to £1,999
  • Online banking and paperless statements required
  • Authorised overdraft buffer of £25 (charged at 19.94% EAR with a £6 monthly usage fee thereafter)

Nationwide BS
FlexDirect
5.00% AER
  • Regular funding of £1,000 per month required
  • 5% interest paid on balances up to £2,500 for 12 months
  • Introductory offer of 0% interest on authorised overdrafts for 12 months (overdraft fee of up to 50p per day charged thereafter)

FIVE-YEAR BOND


Aldermore
5 Year Fixed Rate Account
3.00% AER
  • Minimum deposit of £1,000 up to a maximum of £1 million
  • No further additions or early access to funds – savers will need to tie their money up for the full term
  • Can be managed by post, phone and online

FIXED RATE ISA


Coventry BS
Fixed Rate ISA (23) 30.11.2018
2.60% AER
  • Minimum deposit of £1 up to a maximum of £15,000 in the 2014/15 tax year
  • Allows further additions up to seven days after account opening or while issue remains open, whichever is longer
  • Early access allowed subject to closure of the account and 120 days' loss of interest

Information and rates correct as at 07.11.2014

What next?

Compare current accounts to find one that could boost your income

Check out our pick of the best savings deals

Compare the best ISA rates

Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.

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