Do regular savings accounts pay the highest interest rates?

Regular savings accounts allow you to save small amounts of money on a regular basis. There’s normally a maximum amount you’re allowed to deposit each month and you may be penalised for missing deposits, helping you get into the savings habit and slowly but surely build your pot.

These accounts will almost always beat other savings accounts in a straight comparison of headline interest rates. However, it isn’t always that simple. Unfortunately, many people drawn in by these attractive rates are then left feeling short-changed by the amount of interest they eventually receive, as behind the disappointment is a lack of understanding over exactly how the accounts work.

How interest is paid on regular savings accounts

The most common misconception when it comes to regular savings accounts is over how interest is applied. Many savers assume that the headline rate is paid on the full amount deposited after a year, when in reality it works a little differently.

The limit on the amounts that can be deposited each month means there’s a maximum amount of interest that can be earned, and because you’re not depositing a lump sum at the outset, the amount of interest you’ll actually earn will start off small before snowballing as your deposits increase. However, the overall amount can still be smaller than you may initially expect.

How does this compare to other account types?

Things can be very different if you deposited a lump sum into a fixed rate bond, because even if the headline rate is lower, you could actually end up earning more in interest thanks to the higher initial deposit. The table below offers a handy comparison.

Use our lump sum savings calculator to see how much you could earn by depositing a set sum into a savings account.

Choosing the best regular savings account

As the examples above demonstrate, a higher regular savings rate doesn’t necessarily mean higher interest when compared to other accounts. This is why choosing the best deal is vital.

While it goes without saying that your first consideration will likely be the rate itself, it’s important to consider the deposit limits just as much. This is because having an account with a higher interest rate but a lower monthly deposit may result in you earning less interest than an account with a lower rate but a higher investment limit.

For example, using the table above shows that a regular savings account with a rate of 6.5% but a maximum monthly deposit of £100 would result in interest of £43.10 over the year. Conversely, if you had an account that paid a lower rate of 5% but would let you deposit £300 per month, you’d earn interest of £99.01 – more than double. This is why you should always do your sums first (our monthly interest calculator can help).

Other things you should consider include:

• Terms. Regular saving accounts typically have 12-month terms, but you may be able to find other options more suitable for your needs.

• Withdrawals. Some accounts will allow you to make withdrawals during the term, while others will penalise you for doing so. Just remember that if you do make a withdrawal, it can affect how much interest you earn, and you may not be able to replace any lost funds.

• Deposit expectations. Some accounts expect you to make a deposit every single month and will penalise you for missing any, while others are more flexible. However, skipping a monthly deposit will mean you sacrifice interest, so make sure to weigh up the risks.

• Fixed or variable rates. Check whether the rate offered is fixed or variable (remember, variable rates can change at any time, so you can’t guarantee how much interest you’ll earn).

• Requirements and restrictions. Always check the terms of any regular savings account before you make your decision. For example, lots will only be available to existing customers and/or will ask you to have a linked account, while others are only available in certain postcodes. Check how you’re able to open and manage the account as well, as this could have a bearing on your decision.

Should I get a regular savings account?

While the interest you earn may be lower than initially expected, regular savings accounts can still be worth considering. They can be particularly suitable if:

• you don’t have a lump sum to deposit
• you want to make regular contributions to get into the habit of saving
• you’ve got something specific you want to pay for in a year’s time

Many people choose to have a regular savings account alongside other versions to meet a range of savings goals, and there’s nothing to stop you opening more than one regular saver either if you want to really make the most of the higher rates.