Could you maximise returns by opening multiple current accounts?
As inflation hit 2.9% in May, savers are having to make their money work even harder to get a decent return on their cash.
While there are no open-to-all standard savings accounts which can pay inflation-busting rates, a number of high interest current accounts pay up to 5% on your deposits. Some also have linked savings accounts paying up to 5%, which means customers must have a current account with the bank or building society to be eligible.
In comparison, the top easy access savings account currently pays just 1.25%.
Tom Adams, head of research at Savings Champion, said high interest current accounts are a great addition to the market and are an alternative to consider in this period of record low interest rates.
He said: “These accounts are usually a bit more complicated than a traditional savings account and there are a number of hoops to jump through and potential hazards to avoid, in order to get the returns on offer.
“Those with larger amounts to invest may be wondering how using current accounts will help beyond the first part of their savings. However, provided you stick to the rules for each account, you can open multiple accounts and cover a larger overall balance.”
With the higher rates come smaller savings limits and stricter eligibility criteria, such as a minimum monthly deposit and minimum number of direct debits or standing orders that have to be set up for each current account.
But you shouldn’t let that put you off. James Blower, managing director of Savings Guru, says there are astute savers who are opening up multiple current accounts and operating them like savings accounts to get the best rates.
He says: “Most cap the interest payable up to £3,000 or £5,000 or only pay it on balances between £2,000 and £5,000, for example. Most require direct debits on the account to try to encourage actual current account switchers and usage. They also have minimum monthly pay-ins to encourage you to have your salary paid in to the account.
“Effectively they are adding more hoops to go through if you aren’t using them for their purpose. However, savers with lots of time and patience are opening multiple accounts and then setting up standing orders to move money around them all. They spread their direct debits around them too or sign up to low cost services by direct debit to meet the criteria.”
Both Adams and Blower acknowledge that the process of opening multiple accounts does require patience because of the administration and diary-keeping, so whether it’s worth it depends on how much you value your time and the level of cash savings you have.
The top high interest current accounts
Here are the top paying current accounts currently on the market, according to Savings Champion.
If you opened one of each, you could save up to £37,000 and the total interest received for a year would be £760 – which equates to an interest rate of approximately 2.054%, much higher than the easy access savings account offer:
Nationwide – FlexDirect Current Account
This account pays 5% AER on balances up to £2,500, although the headline rate only lasts for a year. After 12 months, account holders will see their interest rate fall to just 1%, at which time it may be best to switch to an alternative. You must fund the account with £1,000 a month.
Tesco Bank – Current Account
At 3% AER on balances up to £3,000, this account is one of the next highest paying options and there is no introductory rate. You need to pay in at least £750 per month and set up three direct debits to come out of the account each month.
TSB Bank – Classic Plus Account
At 3% AER, this account has no introductory period and there is £5 cashback every month for having two direct debits per month and another £5 cashback each month if you spend with your debit card at least 20 times a month. The main downside is that the rate applies to balances up to £1,500. It comes with a £500 per month minimum funding requirement, which is less than some alternative accounts on the market at the moment.
Bank of Scotland – Vantage Current Account
While it’s not the highest rate available, the 2% AER still puts many traditional easy access savings accounts to shame and there is a higher than usual maximum interest-bearing balance of £5,000. Bear in mind that £1,000 needs to be paid in each month and two direct debits set up.
Lloyds Bank – Club Lloyds Current Account
The 2% AER is available on larger balances of up to £5,000. The main drawback is that to avoid a £3 monthly fee, you must pay in £1,500 per month, which is larger than many alternatives on the market. This account is mainly good for those with larger balances.
Santander – 123 Current Account
It pays a headline rate of 1.50% AER on balances up to £20,000, which is much larger than any of the alternatives in the current account market though it comes with a £5 monthly fee, which could quickly eat away at your interest. Savers need to pay in at least £500 per month and set up two direct debits. The account offers cashback on household bills, which alongside the interest received could mitigate the monthly fee.
What else should you watch out for?
As well as meeting the requirements and being aware that the rates are variable so could be cut given the usual notice periods, Blower says that opening several current accounts could also have an impact on your credit file.
“Some banks carry out a soft search which doesn’t leave a mark on your credit file but if a current account offers an overdraft facility, a hard credit search could be applied. It shouldn’t lead to an adverse situation but for someone on the borderline, it may not help them out,” Blower says.