The news has been away with the negatives of interest rate rises on those who hold debt such as loans and mortgages. But for the savers among us, interest rate rises can also be a great thing.
Many banks with savings accounts are now reporting their highest interest rates for over 10 years and topping the list is First Direct’s Regular Saver Account which is now offering a headline 7% return over its 12 month term.
How does the Regular Saver Account work?
As with many banks offering high interest rates on savings, you are unable to put in a lump sum at the start of your saving. For the savvy saver, this would maximise the interest rate gain.
Rather you need to “regularly save” into the account at a value of £300 per month over each of the 12 months. Over the course of the 12 months, your regular savings will earn interest of £136, considerably less than the £252 potential if lump sum invested.
How is this 7% interest rate calculated?
As you are paying in £300 into the account each month, the interest in only paid on that value in months already paid in. A quick calculation on this gives us a total interest of £1.75 in month one.
300*0.07=21/12= £1.75
Amount saved*Annual interest=Interest per year/months per year=Monthly interest.
In month 2, then your are earning interest on the first months contribution, the interest earned in month one and interest on the second contribution and so on.
The totals of each month added up would come to be around £136. Not bad if you were going to save the money anyway,
Benefits of a high interest savings account
- Guaranteed returns
- Putting money to more efficient work
- Possible bank sign up bonuses
- Mostly risk free (with caveats)
Negatives of high interest savings accounts
- Money will still be eroded by inflation
- Stocks may perform better if your money was invested in those.
Optimising your finances with high rate interest accounts
If you currently are making mortgage overpayments, it is key to figure out when it might make sense to stop these in favour of a high rate savings account.
Going back to our chalkboard, For the £3600 we put into our savings account and the return of £136, we’re effectively receiving a 3.77% return rate. Generally speaking, anyone with a mortgage interest rate with 3.76% or less would be financially better off. One thing to consider however, is if you can put the full lump sum into your mortgage without penalty after the 12 months are up.
The same maths would apply to any loans or debt you have. If the earned interest is higher than the other, then it definitely makes sense to consider maximise your earnings.
Taxes on earned interest
When you earn interest on your savings it is important to note that you may have to pay income tax on this. The earnings you make contribute to your overall annual income.
If you currently earn under or close to the basic rate tax allowance, this could put you into a taxable position.
It’s also a huge consideration if you earn over £100k before the 5th April 2023. At this income rate, any interest you earn in this financial year (6th April 2022 to 5th April 2023) would be taxable at the 40% rate.
If you earn close to £100,000 and any interest you earn brings you over this amount, then you lose your final £500 allowance for higher rate tax payers, some of your personal allowance and your tax free child care.
It may then not be financially beneficial for some readers to consider earning interest in savings accounts. Your personal circumstances will of course vary and dictate this,
Other considerations of the first direct 7% regular saving account
£25 to £300 a month
You can only add an amount of between £25 and £300 per month.These accounts do not allow for lump sum investing.
12-month duration
You must hold your money in the account for the full 12-months. If you take any money out, the interest rate will revert to the standard easy access savings interest rate. This is considerably lower at 0.5% at the time of writing.
You can’t skip months
The terms of the regular saving account stipulate that you must not skip any months. You must therefore contribute in each of the 12 months of the accounts terms.
Recap
High interest rate savings accounts are great news and a welcome development for the savers among us. While the headline figure looks incredibly attractive, once we look a little deeper, there are considerable caveats we much remember.
For many, they will generate very easy earnings on their savings and this is always welcome. Be mindful of your own financial position and how this could affect taxation.
If the stars align…fill yer boots as they say.
