Regular Savings Accounts - not as good as it seems

fitznstarts

I get cross when I see the headling grabbing 10% regular savings accounts because the return is not what it seems.

The accounts are fixed for a term (usually a year), so if you pay £100 per month you will have saved £1,200 over a year. Would you expect to see £120 gross interest in your account....? The answer is you won't get much more than £60 or just over 5%. Why?

The first months' savings gives you 12/12ths of 10% - ie the headline grabbing rate. The second month gives you 11/12ths and the last month gives you just 1/12th of 10%. Assume there's a bit of compounding on the early interest and you don't get much more than half the headline rate.

Of course if you are saving out of your salary monthly then this is better than putting it an an account getting 6% gross because over the same year the same thing will happen there - about half the rate. However, if you are retired or taking money out of a good savings account to pay it into an account you think is paying a much higher rate of interest, you might find you are losing interest and potentiallly putting your money into an account with more restrictions than the one you have left.

Please think carefully before doing this!

debbie42

It's surprising how many people do have the wrong expectations of these regular savings accounts. There have been umpteen posts on this board complaining that their interest has been calculated incorrectly.

However, the adverts don't make me cross at all. I'm more than happy to take advantage of (say) the 12% the Halifax is offering to bump up my average savings rate from the 6.5% the feeder account gives me.

OK, it would be much more generous of the Halifax to take all my available savings and give me a 12% return, but that's maybe a teensy bit optimistic.

Milarky

fitznstarts wrote: »

Of course if you are saving out of your salary monthly then this is better than putting it an an account getting 6% gross because over the same year the same thing will happen there - about half the rate. However, if you are retired or taking money out of a good savings account to pay it into an account you think is paying a much higher rate of interest, you might find you are losing interest and potentiallly putting your money into an account with more restrictions than the one you have left.

..ah but the correct way to compare RS accounts to 'good' no notice accounts is to take the average balance in the RS (eg 6 1/2 12ths of the amount paid in) and multiply that by the differential rate of interest (eg 10% minus 6%, or 4%) - this tells you - in one figure how much you benefit by having such an account over the altheratives

So, for the £6,000 total you could pay into the Halifax (limited offer) RS for instance that is 6 1/2 12ths x £6,000 x 4% = £3,250 x 4% = £130!

Admittedly a 4% differential rate doesn't look quite right - with fixed term deposits at 7% it should be nearer to '3%'. But even in that case, that's still nearly £98 extra (over a 7% bond)!

talana

It's certainly true that many people don't appreciate what return they will get.
But that's down to them, it's not the fault of regular savings accounts.
If a regular saver says 10% interest then that's exactly what you get.

The accounts are fixed for a term (usually a year), so if you pay £100 per month you will have saved £1,200 over a year. Would you expect to see £120 gross interest in your account....? The answer is you won't get much more than £60 or just over 5%. Why?

ALL accounts will only pay you interest on the balance you have day by day. Surely that's what you would expect. So in your example, if you expect £120 gross interest then you simply haven't grasped the maths.

Of course if you are saving out of your salary monthly then this is better than putting it an an account getting 6% gross because over the same year the same thing will happen there - about half the rate.

And just to reiterate, you DON'T get half the rate. You get exactly the rate advertised but haven't understood the calculation.

martinman3

I agree with OP, I wonder how much of a bonus the marketing person got who first came up with the idea at H!!!!!!. Maybe it was "Howard" :rotfl:

Those people that tell us how each month they make electronic transfers from a high interest account to another feeder account which has a standing order set up to send it to the regular saver. And if they forget to make the electronic transfer it all falls apart and interest drops to 5% AER.
If they calculated how little extra they were earning for all the effort involved I hope that they would close the accounts and use their time more productively.
Keeping your car running efficiently by doing simple regular maintenance or checking that your car/home insurance was competitive would save far more money.:cool:

The child's version is even worse as the monthly maximum is less and people are regularly asking how to fund it from a child's savings account.

Rant over.

talana

If they calculated how little extra they were earning for all the effort involved I hope that they would close the accounts and use their time more productively.

What effort? I drip feed a sum every month to a regular saver and other than initially setting up a SO online, there's nothing to do.

martinman3

Milarky wrote: »

..ah but the correct way to compare RS accounts to 'good' no notice accounts is to take the average balance in the RS (eg 6 1/2 12ths of the amount paid in) and multiply that by the differential rate of interest (eg 10% minus 6%, or 4%) - this tells you - in one figure how much you benefit by having such an account over the altheratives

So, for the £6,000 total you could pay into the Halifax (limited offer) RS for instance that is 6 1/2 12ths x £6,000 x 4% = £3,250 x 4% = £130!

Admittedly a 4% differential rate doesn't look quite right - with fixed term deposits at 7% it should be nearer to '3%'. But even in that case, that's still nearly £98 extra (over a 7% bond)!

You must be a non tax payer as those are gross figures, the gains for regular tax payers are 80% of that, for higher rate payers are 60% of that.

YorkshireBoy

fitznstarts wrote: »

However, if you are retired or taking money out of a good savings account to pay it into an account you think is paying a much higher rate of interest, you might find you are losing interest...

You haven't thought this through very well have you? If I take money from a 6.5% paying 'clean' account and put it in a 10% paying 'regular saver' account, my aggregate interest rate is around 8.4% on the amount moved.

Now, and especially if you are retired, which would you rather have?...6.5% or 8.4% ?

martinman3

talana wrote: »

What effort? I drip feed a sum every month to a regular saver and other than initially setting up a SO online, there's nothing to do.

Out of interest, which account is that and which organisation is it with ?

debbie42

I can't answer for talana, but I do a similar thing. My SO is from a Halifax current account to the RS. Now it's set up I can forget about it until it matures, I just have to ensure that I have the cash available to support the SO, just like any other.

Milarky

debbie42 wrote: »

I can't answer for talana, but I do a similar thing. My SO is from a Halifax current account to the RS. Now it's set up I can forget about it until it matures, I just have to ensure that I have the cash available to support the SO, just like any other.

Ditto. £500 is covered by the Halifax overdraft anyway and payments in to HFX are now instant from elsewhere. The only requirement is to then back up the payment. Of all the regular savers out there Halifax's RS features are one of the better ones...