Savvy Money: Help to find a home for rainy-day cash

With interest rates on accounts so low, it pays to be disciplined about monthly savings

Savings rates have tumbled recently with both headline and introductory bonus rates on the way down. It's hard to find easy access accounts paying more than 2 per cent and, even if you're prepared to tie your money up for a few years, you may still struggle to get more than 3 per cent. Banks and building societies simply don't need to tempt savers in the way they did before the Bank of England started lending money cheaply through its Funding for Lending scheme.

Headline rates can be deceptive

So what do you do? If you're happy to save every month, you may be able to earn more in a regular savings account. But, although the headline rate can look good, you won't build up as much interest as you would if you'd paid in a lump sum.

For example, if you deposited £3,600 into an account paying 4 per cent on day one, you'd have £3,715 after a year (assuming a taxable account). But if you paid £300 a month into the same account, you'd only have £3,652.

Regular savings linked to current accounts

Another problem is that some of the best regular savings accounts are only available to those who already have a current account with the bank and best rates can disappear quickly.

First Direct had a headline-grabbing regular savings account paying 8 per cent for its current account customers, but it was taken off the market at the start of the month. It says it plans to relaunch the account next month but can't confirm the interest rate.

No other bank or building society pays close to 8 per cent and the next best rate – from HSBC – is linked to a packaged account. If you have one of the bank's fee-charging accounts, you can earn 6 per cent interest over 12 months with its Regular Saver.

If you have one of its fee-free accounts, you'll only earn 4 per cent fixed for 12 months. With both versions you have to pay in at least £25 a month and the maximum you can pay in over a year is £3,000.

Building societies

There are other regular saver options that don't tie you to a current account, such as Cheshire building society's Platinum Monthly Saver Issue 6, which pays 5 per cent on balances above £100 until the end of January 2014. You can miss one monthly payment (of between £100 and £500) and make one withdrawal; more than this and your savings will earn the grand total of 1 per cent in interest. The account is branch based which is no use if you're not local.

West Bromwich and Kent Reliance building societies also have regular saver accounts, paying 4.1 per cent and 4 per cent respectively, but again these can only be opened and operated in one of their branches. The savings limit is lower on the West Bromwich account – at between £10 and £250 a month – compared to £50 to £500 a month with Kent Reliance.

Online account

Norwich and Peterborough building society bucks this trend with a regular saver account (the E-Regular Saver) which you can open and operate online. It pays 2.5 per cent with a "bonus" of 1.5 per cent if you save up to £250 a month for a year and don't make more than one withdrawal.

Verdict

Regular saver accounts can be useful if you want to save out of your income and aren't looking for a home for a lump sum. But you have to be disciplined about paying in money regularly and they're best if you can leave them untouched for a year.

www.savvywoman.co.uk