Here's how regular savings accounts differ from standard savings accounts - explained by a finance expert
by Derin Clark
Regular saving accounts are a great option for those who want to start a savings habit or who are saving for a specific event, such as Christmas or a holiday. But when looking at a regular savings account, it is important to be aware that these accounts operate slightly differently from traditional savings accounts, including how interest is calculated and how the account is managed.
When looking at regular savings accounts in comparison charts, they often offer seemingly higher interest rates than other types of savings accounts. On standard savings accounts, a higher interest rate would mean that you are earning more interest on money held in the account, but the interest on regular savings accounts accumulates differently, so while the higher the interest rate will mean better returns on your money, you may not get as much as you initially think.
For example, the current top rate in the regular savings account chart is currently 3.00% paid on maturity. This account has a one year term, so on a standard savings account it would mean that the full 3.00% interest is paid on the total balance of the account after one year, for example if £1,200 was in the account on the date of maturity, £36 in interest would be earned. With a regular savings account, although the 3.00% interest is added on maturity, the interest is calculated differently, with many providers calculating interest daily, but it can also be calculated on a monthly or yearly basis.
Using interest calculated on a monthly basis as an example to highlight how this works, if you opened the 3.00% regular savings account with a £100 deposit, the 3.00% interest will be divided by 12 and you would get a 12th of that interest on the £100 deposit. If you added another £100 to the account the next month, another 12th of the 3.00% will be used to calculate the interest on £200. This will continue for the 12 months, on the final month the final 12th of the 3.00% interest will be added the full amount in the account.
In short, this means that, although the headline rate on regular savings accounts seems to offer higher interest than any other type of account, how the interest is accumulated means this is not normally the case. Savers looking to get the best rate possible should instead consider a fixed rate bond, which usually offer the top savings rates overall.
How regular savings accounts operate
Whether a regular savings account has a fixed rate term, for example 12 month, or allows instant access, they normally require a minimum to maximum amount to be deposited into the account each month. This can normally be anything from a minimum of £1 to a maximum of hundreds of pounds.
This differs from other types of savings accounts, which usually either do not allow further additions to be added to the account once opened, or have no restrictions on how much and when money can be deposited into the account.
The fact that a certain amount of money has to be deposited into the account each month means that you should be confident that you can meet this requirement before opening the account. If not, an easy access savings account – which normally allows money to be deposited into the account whenever the saver chooses – could be a better option.
Saying this, the fact that regular savings accounts have this requirement often makes it a good option for those who are normally bad at saving as they have to form a good savings habit. In addition to this, there are some regular savings accounts available that don’t require a minimum amount to be deposited each month, which could be a good option for those with less stable incomes.
Before opening any type of savings accounts, you should consider a range of factors and not just the rate being offered to ensure it is the right account for their needs. For example, if you think you will need to access the money within your account, you should make sure that you will be allowed to do this, or, if you want to build up your savings over time, you should ensure that you can make further deposits into the account.
To see all the savings accounts available and compare rates, visit the savings comparison chart on Moneyfacts.co.uk