Regular saver rates of up to 8% aren’t as good as they look, says SAM BARKER

At first glance, an 8 percent savings rate seems like the answer to the dreams of many savers, something that was unthinkable a year ago.

The standout rate on the market right now is the 8 percent offered by Nationwide’s latest regular saver, which was announced last week.

But there is something curious about the sudden rise of the regular saver, as well as the interest of big banks in promoting deals.

This is especially strange when you look at the facts about how little use is made of regular savings deals.

Despite all the high interest rates, regular savers actually have less cash now than they did a year ago, according to analysis of Caci data by Paragon Bank – £20.7 billion now compared to £21.1 billion in 2022.

Meanwhile, there is a whopping £528.1 billion in easy-access accounts, £258 billion in term accounts and £118 billion in national savings and investment premium bonds.

But if you look at the way banks promote regular savers, you would think this was the most popular savings product in Britain. So what’s going on?

Not only can regular savers pay less interest than consumers think, I also believe the deals are being cynically used by big banks to encourage customers to open a checking account – and to deflect criticism of low savings rates elsewhere.

Regular savers have deep roots

You could be forgiven for not being familiar with regular savers, which historically haven’t been a very popular option.

With regular savers you can pay a limited amount every month, normally no more than € 500, but sometimes as little as € 150. In return, you get all the money back after a year, plus interest.

There is often an interest penalty if you withdraw some of that money before the term is up.

For years, regular savers were the domain of smaller building societies, with the deals normally taken out by people on lower incomes.

Many were a direct replacement for the ‘savings clubs’ of yesteryear, where Britons deposited a small amount every month to be able to pay for something a year from now – often the expensive Christmas period.

Some mortgage banks still label their regular savers as ‘Christmas’ or ‘festive’ for this very reason.

Sudden bloom

Then something happened and the number of regular savers exploded. The catalyst was the start of successive increases in the Bank of England’s base rate.

In response, savings interest rates rose from the doldrums where they remained for years. And none have risen higher than regular savers, who now beat all other savers when it comes to rates.

According to financial experts Moneyfacts, there are now 71 regular savers in the market, an increase of 25 percent from 57 in November 2021, the month before the base rate started to rise.

Nationwide’s newest regular saver pays 8 percent. Even the next best regular saver, First Direct, pays 7 per cent, with Lloyds Bank close behind at 6.25 per cent.

All three deals have interest rates that are much higher than savers can get elsewhere.

By contrast, the best easy-access deal, from Leeds Building Society, pays 5.1 percent, and the best one-year bond pays 6.2 percent, from National Savings & Investments.

I think regular savers are a good choice for many savers – and I have one myself.

But what I doubt is the sudden interest of large banks in launching flashy regular savers, while for years these were mainly the domain of smaller mortgage banks.

Assuming you took the Nationwide deal above, then paid a maximum of £200 each month and never made any withdrawals, you would have earned £104 in interest at the end of the year, on the £2,400 you saved.

You can see where I’m going with this: £104 isn’t 8 per cent of £2,400, it’s 4.33 per cent.

Of course, 4.33 percent is still a very decent interest rate. But savers could get a lot more by putting the same amount into the best easy-to-access deal, from Leeds Building Society, which pays 5.1 per cent.

That deal would earn the same saver £122 in interest – 17 per cent more than Nationwide – and also with greater flexibility, as you won’t be penalized if you withdraw money.

Easy-to-access deals also tend to be much easier to set up and run than regular savers, as there are fewer strings attached and you don’t need to have a current account at the bank to take one out.

The reason regular savers actually pay less than the nominal interest rate is that you only earn a fraction of that rate each month when you top up the regular saver.

There is only one month of the year when you get full interest on your savings.

Of course, this is all explained in the small print of savings deals. But I’m not convinced that many savers read this literature and are then deeply disappointed when they realize they’ve committed to a one-year deal that yields less than they expect.

And that one-year commitment is important because if you take money out of a regular saver, you normally lose out on the nominal interest – or the deal closes, as is the case with First Direct’s, for example.

The case of the banks

Banks will defend the sudden boom in regular savers by saying Britons have a poor track record when it comes to putting money away and they want to help.

A regular savings account helps, the banks argue, by encouraging the habit of saving.

I completely agree. But let’s be honest: getting more people to save isn’t really the reason why big banks are now offering seemingly decent rates on these deals.

If banks really cared about encouraging a savings habit, why didn’t the current boom in regular savings deals happen until interest rates started rising? Where were the regular savings deals from big banks when interest rates were low and the British were crying out for decent savings products?

Until the Bank of England started raising the base rate, regular savings deals were among the least requested and least promoted on the market.

But by offering apparently high regular savings rates, the banks successfully rebuffed criticism from MPs over their poor easy access rates earlier this year.

Big banks’ easy access rates typically hover around 1.5 to 3 percent, while Nationwide has an unusually high rate of 4.25 percent on one of its deals.

The advantage of a regular saver for banks is that customers are unlikely to withdraw their money during the term.

This rigidity is a boon for the banks, because it provides the certainty that the money deposited with regular savers will remain there for a certain period of time. During that time, banks can use the money to invest elsewhere, which is harder to do with more flexible deals such as easy-to-access accounts.

Let’s also not forget that if you want to take out a regular saver, you will need to take out a checking account with that bank – with one or two exceptions.

That then gives banks access to another valuable resource: your data. Based on your spending habits, a bank can learn an incredible amount about you and use this to sell you loans and other financial deals.

So if you’re tempted by the high rates for regular savers, I don’t blame you – and the deals have their place.

But apparently high interest rates on regular savings deals at major banks cannot and should not replace rates on savings products that consumers use in much larger numbers: easily accessible accounts.