Regular savings accounts: is 8% worth it?

Regular savings accounts, as the name suggests, require account holders to put away a minimum amount of cash each and every month. In return, they offer higher rates of interest.

Of course, there are catches. More than the average thorny bush in fact.

How they work

Interest rates for regular savings accounts range from between 2% and 8% AER (annual effective rate).

However, the high rates of interest are constrained, in practice, because regular savings account holders must save a set amount every month.

Minimum monthly deposits typically range from between £1 and £25 and maximum deposits can range from £200 to £300, with many accounts allowing an increase every month.

Interest is applied monthly but, because savers must stay within these limits, the interest rate doesn't apply to the account balance at the end of the regular savings term.

So, for example, if the interest rate is 8% AER and the maximum saving is £10,000 savers shouldn't expect to get £800.

Rather, they'll receive 8% AER every month on what they've managed to save so far: the return at the end will be much lower.

As you can see, though, even taking that into consideration, regular savings accounts can offer some of the highest returns on stowed away cash.

But small print is key: here's what regular savers should look out for.

Small print

Missing payments

Missing a monthly payment can have painful consequences.

The account can be automatically closed or the interest rate dropped altogether. Other regular savings accounts punish missed payments by limiting the overall amount that can be saved.

Loyalty: current accounts required

Banks use the regular savings accounts' spectacular interest rates as a way to attract new customers. To enjoy their benefits, consumers must often hold a current account from the same bank.

Sometimes this isn't a problem, as when the best bank accounts and regular savings accounts are offered by the same provider. At other times, a poor quality current account may, over the long term, offset any potential benefits brought by a short-term high interest regular saver.

In this case, savers are better off applying for a regular savings account that doesn't require a pre-existing current account.

Withdrawals

Withdrawals from the highest interest regular savings accounts are often severely punished. Some specify that making even one withdrawal before a specified period of time has elapsed will result in the account being closed and just 0.5% AER interest being paid on all the money saved.

Others may allow one withdrawal per year without penalty.

Tax

Regular savings accounts are taxed, which means that basic rate taxpayers will lose a fifth of any interest earned.

It can work out better, therefore, to save using a tax-free Cash ISA in the first instance. After you've paid in the £5,340 allowable during a tax year, think about a regular saver to supplement your savings.

See our guide on how to get a better rate on your savings for more on the ideal order of saving with different types of accounts.

Extras

Some accounts offer extra incentives for their savers. For example, some accounts offer a £100 bonus that can be earned by depositing at least £1,500 a month.

Others provide those switching their current accounts over with a £100 reward for doing so. More feeble attempts enter subscribers into a prize draw.

Timing

The advertised interest rate for a regular savings account will eventually revert to a regular rate. This will usually be after a year, but check to make sure.

After this time, it's time to up sticks and move on to the next account.