If you’ve got a decent chunk of cash savings and you want to earn a regular income from it, there are accounts on the market which pay interest monthly, and you can choose to withdraw it or keep in in your savings pot to earn more interest.
What is a monthly income savings account?
As the name suggests, this an account pays you the interest earned on your savings monthly, rather than quarterly or annually. Many different types of savings accounts can be monthly income payers: you can find Cash ISAs, notice accounts, fixed-rate bonds and easy-access accounts that all offer this feature.
Pros and cons of monthly income savings accounts
The key selling point is that you can take a regular income from your cash savings without eroding your total pot over time. You have the flexibility to choose from a range of different types of savings accounts which give you the option to take your interest monthly. You can also usually choose whether to take your interest as a payment into your bank account each month, or to leave it in your pot so it can benefit from compounding (earning interest on interest) so your pot can grow more quickly.
These accounts are best for people with large sums saved, so you can earn enough interest to get a reasonable payout each month. However, the Financial Services Compensation Scheme only covers your savings up to £85,000 per regulated financial institution, in the event your provider collapses, so if you have a lot of savings it is worth spreading them across more than one bank.
Another downside is that the current record-low rate environment is punishing savers with poor savings rates on offer. Research from Which? found there is quite a gap between the rate available on accounts that pay interest monthly versus annually. If the rate you get is lower than the rate of inflation, the purchasing power of your savings pot will shrink over time. Depending on the type of account you choose, you may also face restrictions on how much and how often you can deposit and withdraw.
Where are the best monthly income savings account deals?
The Bank of England base rate is at rock bottom at the moment, which means savers are struggling to find decent deals. Eleanor Williams, finance expert at Moneyfacts.co.uk, commented:
“There have been withdrawals and a drop in product numbers, which may be effecting the average rate. Hopefully, once providers have had a chance to assess, react to these unprecedented times, and reposition themselves in the market, then we would expect to see products launched again.”
These are a few of the best rates on offer at the moment, although things are changing quickly as providers start to pass on the latest base rate cut.
- UBL UK 7 Year Fixed Term Deposit is a seven-year bond paying 1.95% AER. You can only open and manage the account in branch or by post. You can save £2,000 up to £1m. You can access your money early if you forfeit 730 days of interest. Your monthly interest must be paid out into your bank account.
- RCI Bank UK ‘s Fixed Term Savings Account is a five-year bond paying 1.9% AER which lets you choose to pay out or compound your interest. You can save £1,000 to £1m and you can open and run the account online. No withdrawals are allowed.
- ICICI Bank UK’s HiSave Notice Savings Account requires 95 days notice but pays an AER of 1.6%. Minimum opening amount is £1 and you can make withdrawals into an ICICI bank account.
- Virgin Money Double Take E-Saver pays a variable AER of 1.31% with no notice period for withdrawals. Interest can be paid away or compounded, but you can only make two withdrawals per year. You can save £1 to £250,000.