Financially savvy people know that it’s a good idea to keep a rainy day fund in cash, but unfortunately, the interest you can earn on it has been disappointing in recent years. The good news is there are now some better rates available if you are prepared to shop around and switch.
What is an interest-paying account?
It’s any type of savings account where you can earn a return on your cash in the form of interest. It could be a Cash ISA, a savings account linked to your bank account, or a savings bond where you lock your money away for a few years. At the moment some of the highest rates on offer are actually on cash balances held in current accounts.
Interest-paying accounts: the benefits vs the risks
Sometimes you get a juicy interest rate on a savings account for the first year, and then your provider automatically moves you to a paltry standard rate. If you don’t switch at this point, you could lose out. In fact, financial watchdog the FCA is considering changing the rules around easy access savings accounts, forcing providers to offer savers a single easy access rate 12 months after they open an account.
Another risk is that of higher inflation– if the prices of the everyday goods rise faster than the interest you can earn on your savings, the purchasing power of your cash diminishes over time. Luckily, inflation in the UK is currently falling so many cash savings accounts are now offering inflation-beating rates. However, there is also the risk the Bank of England could cut interest rates in future, and banks could pass this on to consumers with worse deals on their savings products.
How to get the highest interest savings account
Usually you will get a better rate if you can lock your money away for a time. The longer the better: five-year fixed-rate bonds will usually pay more interest than one-year bonds, for example. This is an advantage but could also be a risk if you later find you need access to your cash and have to forfeit interest to get it, or better rates become available elsewhere but your money is locked in.
An important benefit of interest-paying accounts is that they will usually (if the provider is regulated) be covered by the Financial Services Compensation Scheme (FSCS) which protects your savings up to £85,000 in the event your bank goes bust.
Which are the top-paying accounts?
- The best interest-paying account at the time of writing, according to Moneyfacts, was the Nationwide BS FlexDirect account, a current account offering 5% AER on credit balances up to £2,500 for the first year if you pay in at least £1,000 a month.
- The top regular savers were from Kent Reliance and Saffron Building Society, offering AERs of 3% for a year if you pay in £500 and £250 a month respectively.
- The best fixed-rate savings bond was the UBL UK five-year fixed-term deposit paying 2.38% if you pay in at least £2,000.
- The best Cash ISA was a five-year fixed rate from UBL UK at 2.03%.
- The best easy-access savings account was the Gatehouse Bank Easy Access Account, offering 1.4%.
How can I choose the best interest-paying account?
A good starting point is to look at the best-buy tables on comparison websites such as MoneySupermarket, MoneySavingExpert, Moneyfacts or Which? Look for the AER, which stands for Annual Equivalent Rate, to compare rates across different providers.
For an alternative to cash savings accounts, you could take a higher-risk approach and invest some of your cash in an investment ISA for the potential to earn higher returns.