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‘I opened a 5% regular saver account but the interest earned is much less – why?’

Written by: Paloma Kubiak
A number of regular saver accounts pay headline grabbing 5% interest rates. But you may be disappointed with the actual returns received. We explain why.

The average easy access account is paying just 0.42% while the best easy access account, currently offered from RCI Bank (Freedom Account), pays 1.30%.

But regular saver accounts (many are linked products so customers must have a current account with the bank or building society to be eligible) offer headline-grabbing rates of 5%, much higher than the alternatives.

Given inflation climbed to 3% in September, the rates, which usually apply to smaller amounts such as £200 each month over the course of the year, are also-inflation beating.

Here are five of the top paying regular saver accounts (rates fixed for 12 months):

  • First Direct: 5% AER, minimum £25 and maximum £300 per month (maximum £3,600 over the year).
  • HSBC: 5% AER for Premier and Advance customers, minimum £25 and maximum £250 per month (maximum £3,000 over the year).
  • Marks & Spencer: 5% AER, minimum £25 and maximum £250 per month (maximum £3,000 over the year).
  • Nationwide Building Society: 5% AER on its Flexclusive Regular Saver 2, minimum £1 and maximum £250 per month (maximum £3,000 over the year).
  • Santander: 5% AER on 1|2|3 Regular eSaver (issue 5), minimum £1 and maximum £200 per month (maximum £2,400 over the year).

The idea is that you get into a good savings habit by saving regular amounts each month, though they may impose restrictions or penalties if you need to access your money earlier than the 12-month time period.

However, many people may be left disappointed at the end of the year term as they find their full savings pot hasn’t earned the expected 5% amount.

Anna Bowes, director of independent savings advice website, Savings Champion, says: “While the headline rate is 5% AER, the actual interest rate earned on the deposit over the year is approximately half as the majority of the money is deposited for less than 12 months.

“If you put a maximum £300 per month deposit away, you would have £3,600 over 12 months. But only the first premium of £300 is earning 5% while the remaining deposits earn a diminishing proportion of 5% depending on when the money’s deposited in the 11th, 10th, 9th, 8th month etc.

“The last premium is only going to be there for one month so you’re only receiving a proportion of that amount. If you think about it, the total amount of money isn’t there for the full 12 months.

“Overall the interest earned on £3,600 over the year is £97.50 which equates to 2.71% of the total deposit.

“You are still getting a better rate on the regular saver and it would be better to utilise the 5% AER rather than an account paying 1.3% AER.

“If you had a lump sum of £3,600 earning 1.3% AER, you would receive £46.80 at the end of the year – less than half offered by the regular saver.”

The table below illustrates the interest earned over the 12 months when a saver deposits £300 per month (source: Savings Champion):


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