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High interest current accounts are often thought of as the modern-day savings account. After all, they offer far higher rates of interest than the majority of savings accounts in the market, so surely they're the perfect home for your savings? Well, perhaps not. The low investment limits mean they simply won't be suitable for anyone with a significant savings pot, so although they have the best savings rates, you probably won't get the best returns for your money.
Take a look at our high interest current account Best Buys and you'll soon see why they initially seem appealing. The top rate on offer comes in at an impressive 5%, while the best savings rate clocks in at 2.30%, and it requires you to lock your money away for five years for the privilege.
But look a little closer and high interest accounts may not seem that appealing after all. Indeed, even though Nationwide offers an interest rate of 5%, and TSB boasts 3% interest plus extra monthly cashback, you'll only be able to save £2,500 and £1,500 respectively at those rates. These deals also come with additional restrictions, such as monthly funding requirements and direct debit conditions, so it may not be that simple to profit from these accounts.
The only way anyone with more than a few thousand pounds to invest will be able to make these accounts work is to engage in a bit of crafty behaviour. You could open several high interest accounts (one with each top-paying provider) and split your savings between each, and from then on move your monthly income between them on a standing order basis, thereby ensuring you hit the funding targets.
However, this is always assuming you'll be able to meet the additional requirements of individual accounts, and with most requiring at least two direct debits to be held with them, it may not be that simple. Of course, for those who are happy with that kind of commitment and regular planning, it could pay off – but what if you've got larger sums to invest and don't want the hassle of dealing with several different accounts? This is when you'll probably want to think more traditionally.
Let's say you've got a £50,000 savings pot that needs a new home. You could always siphon off a few thousand for high interest current accounts, but it may not seem worth it – these deals are great for smaller sums, but if you've got a large investment, here's what else you can try:
Quick, simple and effective – fixed bonds offer the best savings rates among traditional accounts, so if you simply want to see your pot grow and don't mind locking it away for a few years in order to do so, it could be just the thing.
Currently the top pick in the long-term bond sector comes from Milestone Savings, a five-year deal that pays an expected profit rate of 2.30%. This means that, if you deposited your full £50,000, you could earn £1,150 in interest after the first year (interest has to be paid away). Alternatively, if you wanted to bank by mobile app and feel like giving a new kid on the block a try, Atom Bank pays 2.25%, which means that at the end of the full five-year term, the effect of compounding would leave you with a pot of £55,883.88.
Your ISA allowance should never be overlooked, particularly given that your level of investment could well bring you over the PSA limit, and if you've yet to use your 2016/17 allowance, you've only got a few days left! If you don't use it you lose it, so you could take £15,240 of that £50,000 investment and squirrel it away in an ISA for the current tax year – and you could keep £20,000 for a 2017 cash ISA, too.
Alternatively, what about a stocks & shares ISA? It could be the ideal solution, particularly if you're comfortable with an element of risk, and given that stocks & shares ISAs vastly outperform their cash counterparts, you could be in the money in a few years' time. This kind of investment could easily overtake the returns of high interest current accounts, too – our figures show that the average stocks & shares ISA fund has grown by a whopping 15.8% during the tax year so far, which makes the 5% return on the top current account seem paltry by comparison.
So, are current accounts really best for savings? If you've got a lot to save, probably not – a far better solution could be to look at traditional savings accounts, ISAs or their stocks & shares alternatives instead.
Compare the best savings rates using our whole of market savings account search tool
Find out more about stocks & shares ISAs
Know your limits – familiarise yourself with the tax allowances for 2017/18
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