Is this the end of the regular saver?

Earlier this month, First Direct and HSBC cut their market-leading regular savings rates from 5% to 2.75% on new accounts, leaving M&S Bank as the sole 5% survivor. The cut means that, excluding M&S, the next best rate that's accessible to all is 3% from Virgin Money, much closer to rates offered on other types of savings accounts. So, are regular savers still worth saving in? We run the numbers to find out...

What is a regular savings account?

The clue's in the name. Most regular savings accounts let (or require) you to put money away on a regular basis – usually each month – with interest paid at the end of the year. They typically offer higher interest rates than standard easy-access accounts, but tend to impose rigid terms and conditions, such as limiting the number of withdrawals you can make, or requiring you to make a deposit every month.

Should I use a regular savings account?

If you currently have a regular saver, especially if it's one of the ones that pays you 5% (so, M&S customers, and HSBC and First Direct customers who already have a 5% account), then hold on tight to that for as long as it lasts, as the rate's fixed for 12 months from when you took it out. But, when it comes to renewal once your year is up, or if you're a new customer thinking of taking one out, it's not as straightforward as it once was.

There are two main ways people use regular savers, either to save directly from their salary, or to move money over from other savings throughout the year to maximise interest. We've analysed each of these in turn:

Option 1: You save from your income into a regular saver

If you're doing this, the regular saver will always win, provided its rate is higher than easy-access rates at the time (this is comfortably true right now for most regular savers, even after the cuts).

If you're using regular savings accounts this way, then as you're adding new money each month that you didn't previously have in savings, it's the best risk-free rate you can get on that money at that time.

The table below shows this clearly – we compare putting £250 a month in to M&S Bank's 5% saver and Virgin Money's 3% saver to putting the same amount in to the top easy access account, paying 1.46%, and the top notice account, paying 1.8%. The regular savers are the winners by far.

Type of account Annual interest if you add £250/mth
Top paying regular savings account (5%) £80.64
Open-to-all regular savings account (3%) £48.53
Top notice account (1.8%) £29.43
Easy access account (1.46%) £23.85

Option 2: You save in to a regular saver by moving money from other savings accounts

Sometimes called 'dripfeeding', this is a time-honoured regular savings account tradition for those who want to max their interest. The idea is that, say, you start with £3,000 in an easy-access account. In month one, you move £250 into the regular saver, leaving £2,750 in the easy access. You'll continue to do so throughout the year, and by the end, you have £3,000 in the regular saver, and £0 in the easy-access account. Then you start again the year after.

This technique means all the money is earning interest in one account or another for the entire year. So how does this affect the calculations of which account gets you the most interest? We compare this 'dripfeeding into the regular saver' technique with leaving the £3,000 in a notice account, a one-year fixed rate bond, and an easy access account for the full year.

Type of account Annual interest on £3,000 (or £250/mth)
1.45% easy access/5% regular saver combo (1) £100.77
1.45% easy access/3% regular saver combo (1) £68.66
1.8% notice account £54.49
1.79% one-year fixed rate £54.18
1.46% easy-access account  £44.12
(1) Assumes money is dripfed from a 1.45% easy-access account (the 1.46% top easy-access account has a limit of three penalty-free withdrawals a year).

Obviously, feeding money in to a 5% regular saver from an easy-access account always wins, and that's still the case for a 3% regular saver (and even a rate of 2.75% of interest for new or renewing HSBC and First Direct regular saver customers leaves you £10 up compared with the other options).

If you use this 'dripfeeding' technique, you'd need regular savers to get down to around 2.25% (and all other accounts to stay the same) before you start hitting parity with the notice account's 1.8% in terms of actual interest paid out.

So, should I get a regular saver?

Currently, they're still a decent shout for most people. As a quick summary:

  • If you're saving from salary, then a regular saver will still pay more than any other account on that cash.
  • If you're moving money from other savings, it's still worth getting a regular saver provided it pays more than 2.25%.

From the above, the regular saver is still worth a look for almost everyone, but the future's much gloomier than it was last month, especially if you're a First Direct or HSBC customer who's seen the rate they can get on renewal almost cut in half. The regular saver isn't dead, but it might just have one foot creeping in to the grave.