The insurer's initiative is aimed at attracting the funds needed to underpin its increasingly successful mortgage-lending operation. It will also help to hold back the relentless downward spiral in the amount paid to savers caused by the three successive waves of mortgage rate reductions.
Direct Line account-holders will be offered 4.6 per cent before tax on savings up to pounds 10,000, rising to 6 per cent for deposits above pounds 25,000. The company claimed yesterday that its rates beat those on offer from most other large banks or building societies.
In a further twist designed to capture accounts from entire families or groups of friends, the insurer offered them the chance to pool savings so they can receive interest at the higher rate.
Up to six people will be allowed to pool accounts, with interest on each deposit being calculated separately. Individual account-holders will be able to segment their savings into separate parts, such as holidays or home improvements.
Jim Spowart, managing director of Direct Line Financial Services, said: "Our commitment is to give customers the best-value deal on all our products, including savings rates. Our low-cost operation allows us to provide a deal which will be difficult for banks and building societies to emulate."
Direct Line's move reflects its runaway success since being founded by Peter Wood, its chief executive, in 1985.
The company has since expanded from its motor insurance base, which has 1.9 million customers, into home and contents cover, term assurance and personal loans.
In the process, Mr Wood has become one of the best-paid chief executives, earning bonuses of up to pounds 18m a year until Royal Bank of Scotland, which part-owns Direct Line, bought out his bonus scheme for pounds 24m in 1993.
The firm's mortgage arm, launched 10 months ago, has lent pounds 210m, financed until now by borrowing from money markets. Direct Line's venture into banking mirrors that of building societies, which finance much of their lending from the savings they attract.
A Direct Line spokeswoman said yesterday that it aimed to enter into a head-to-head contest with banks and building societies for their accounts by offering better rates than rivals.
However, according to MoneyFacts, a statistical service giving details of the best savings rates, Portman Building Society's instant access account yesterday offered 4.8 per cent gross on savings above pounds 100, against a minimum savings level of pounds 1,000 with Direct Line.
Teachers Building Society's Bullion Share account offers 5.55 per cent on deposits above pounds 500, while Co-operative Bank's Pathfinder account pays 5.37 per cent on deposits above pounds 5,000.
Direct Line customers will be able to move funds in and out of their accounts by calling the company between 8am and 8pm Monday to Friday.Reuse content