Maximize Savings: A Strategy to Earn Over 7% on Cash Deposits
Savers can potentially exceed stock market returns by strategically using multiple high-street bank 'regular saver' accounts, though setup requires attention to detail.
Savers can achieve interest rates of up to 8% on their cash deposits by employing a strategy that involves opening multiple "regular saver" accounts from various high-street banks. This approach, which allows for saving over £1,000 per month, can yield more than £550 in interest annually, potentially surpassing average UK stock market growth without the risk of capital loss.
Utilizing Regular Saver Accounts
High-street banks offer regular saver accounts, often with attractive rates around 7% to 8%, to attract new customers. However, these accounts typically have restrictions, such as limiting monthly deposits to between £200 and £300 to qualify for the highest rates. To maximize savings, individuals can open multiple regular saver accounts, spreading their monthly contributions across several institutions.
For example, by utilizing accounts from Lloyds, Santander, Zopa, First Direct, and the Co-op Bank, a saver could deposit a total of £1,300 per month. Lloyds and Santander offer 8% interest, while Zopa, First Direct, and Co-op Bank offer 7%. This diversified approach can lead to an average interest rate of approximately 7.36% on the total deposited amount.
Setting Up the Accounts
To take advantage of these offers, a current account is generally required with each bank. Some banks, like Lloyds, extend their 8% rate to associated brands such as Halifax and Royal Bank of Scotland. These accounts can often be opened online, and some may offer incentives like cashback for new customers through specific platforms.
While current accounts are typically free, it is important to note that opening multiple accounts in a short period could temporarily affect one's credit score. Savers should avoid this if they are planning to apply for a mortgage or other significant loans in the near future. It is possible to open these accounts solely for the regular saver feature without intending to use them as primary banking accounts.
Each regular saver account has a monthly deposit limit. For instance, First Direct and Zopa permit up to £300 per month, Lloyds and Co-op allow £250, and Santander accepts £200. By combining the maximums from five selected accounts, a total of £1,300 can be saved monthly. For those with additional funds, other regular saver accounts with slightly lower rates are available.
Funding these accounts is usually managed via standing orders from a main current account, typically set for the first day of each month. The First Direct account requires a slightly different setup, involving a standing order into its current account to then facilitate the transfer to the regular saver.
Interest Accumulation and Tax Considerations
Once funds are deposited, they begin earning interest at the advertised rates. The Zopa account requires renewal after six months to maintain the rate, necessitating a diary reminder. Most accounts permit withdrawals, though the First Direct regular saver is an exception.
After a full year, assuming all accounts are maximized and the Zopa account is renewed, a total of £16,157.75 could be saved, with £557.75 earned in interest. For basic-rate taxpayers earning no other interest outside of an Individual Savings Account (ISA), this income would likely fall within the £1,000 personal savings allowance, meaning no tax would be due. Higher-rate taxpayers, with a £500 allowance, might pay approximately £23.10 in tax on this interest, still leaving them with a substantial return.
End of Term Strategy
A key aspect of regular saver accounts is that their high rates typically expire after a year. For example, the Lloyds saver rate might drop to around 1.3%, First Direct to 1.75%, and Santander to approximately 3%. At this point, it is advisable to transfer the accumulated savings into a higher-interest account, such as a cash ISA, to continue earning returns tax-free. Current cash ISA rates can be around 4.7%, potentially yielding over £750 in interest on a £16,000 pot.
While most banks limit customers to one regular saver account at a time, upon closing existing ones, new accounts can be opened, possibly with different institutions offering improved rates. Regular saver account offerings are dynamic and subject to change.
Comparison to Stock Market Performance
The strategy's average annual rate of 7.36% is competitive with, and in some historical comparisons, exceeds, the average growth of the UK stock market. The FTSE 100's average compound annual growth rate over 42 years has been around 5.8%. Including reinvested dividends, this figure rises to approximately 7.8%, which is slightly higher than the regular saver strategy. However, the regular saver approach offers the significant advantage of being risk-free and providing access to funds when needed, making it suitable for both short-term and long-term financial goals. Additionally, regular saver accounts are fee-free, unlike investments which often incur charges that reduce overall returns.