Interest returns on easy-access accounts are pretty dismal at the moment. So, all things considered, are current accounts now the answer?
Savers are still struggling to find decent returns on their savings, following another round of cuts and withdrawn accounts.
Rates with National Savings & Investments (NS&I), the Treasury's savings arm, were slashed in September following a wave of interest from beleaguered savers. The Direct ISA – previously the market leader for balances under £40,000 – was reduced from 2.25% to 1.75% following an influx of deposits.
The market-leading instant access ISA from First Direct, which has offered 3.00% on nest eggs worth £40,000, is to fall to just 2.00% in November 2013.
And with the closure of Tesco's 2.00% cash ISA to new customers, the NS&I account is likely to retain this high level of demand, which may lead to further cuts in the near future.
The market for fixed-rate bonds is showing some signs of improvement. Recent increases to longer-term fixes include the 4-year bond from Vanquis Bank, which improves to 2.86%, and Shawbrook Bank, which has improved its 3-year bond to a market-leading 2.65%.
But inflation-busting accounts remain at a premium. The 7-year bond from the Skipton Building Society (3.50%) is one of the last surviving accounts to keep pace with the rising cost of living. Savers will need to invest a minimum of £10,000 and will be without access to their cash until the end of the decade.
Leeds Building Society also offers an alternative long-term option, with a five-year fixed rate ISA at 3.05%. Savers who prefer the flexibility to withdraw some of their cash over this term can opt for the lower-returning ISA, at 2.90%, which allows a withdrawal of up to 25% of the funds without penalty. (Read more about the Leeds ISA here.)
Skipton's 7-year bond (3.50%) is one of the few options left for savers to match inflation.
Current Accounts – the New Interest Option?
The latest round of cuts might encourage savers to look towards current accounts for their rewards. Banks are now beginning to offer attractive interest rates or cash incentives to those who switch current accounts using the new 7-day service.
So, what's on offer?
The Santander 123 Current Account, which has attracted almost a million new customers in 2013, offers tiered interest of up to 3% for credit balances exceeding £3,000.
(See our 123 Current Account review here.)
Nationwide, meanwhile, offers interest on two current accounts. The free FlexDirect account offers a stunning 5.00% interest on balances up to £2,500 for the first 12 months, before reverting to 1%.
(See our FlexDirect account review here.)
The FlexPlus account, the society’s first paid-for account, offers 3.00% on balances up to £2,500. After tax, the maximum interest return is £60 for the year, which effectively covers half the cost of the account’s comprehensive insurance package.
(See our FlexPlus account review here.)
The new TSB Plus account, available from 31 March 2014, offers 5% on balances up to £2,000. Unlike Nationwide's FlexDirect, there is no predetermined time limit on this interest premium. Customers are also not required to switch bank accounts to receive the perk.
(See our TSB Plus account review here.)
Several banks are offering cash incentives to switch current accounts, with the new seven-day switch system making it far easier to initiate a transfer.
First Direct is offering £125 to switch to its current account, which is considerably more than most savers can expect to receive in annual interest.
At the average easy-access savings rate of 0.61%, it would take a balance of £5,000 over 4 years to achieve this amount in interest, even before tax reductions are accounted for.
So, while it may seem unconventional, current accounts must now be seen as a viable alternative for those hoping to make the most from their cash.
(Find out more about the new current account switch service here!)