The death of high interest current accounts

High interest current accounts: dead and buried

RIP, high interest current accounts.

I’m officially calling it. High interest current accounts are dead in the water. They were a fab way to earn decent interest on emergency cash, faced with rock bottom savings rates elsewhere.

Previous post: Earning interest from current accounts

I wrote this post back in February, when TSB announced it would be halving the rate paid on its Plus account. From May 2, interest on the TSB Plus current account was slashed from 3% a year to 1.5%. This came hot on the heels of Santander’s decision to shrink interest paid on the 123 current account from 1.5% to 1% from May 5.

Rates were only cut further during coronavirus. This week, TSB announced it would be removing interest on the Plus account completely, down from 1.5% to zero from 2 December. Santander had already cut the rate on the 123 account further, shrinking to 0.6% from 3 August.

Sadly, these were the final nails in the coffin for high interest current accounts, after a long line of cuts to previously tempting interest rates.

A few years back, banks were willing to offer heady rates up to 5% to lure in new customers. I was willing to jump through all the hoops to grab the interest on offer – opening new accounts, setting up direct debits, juggling minimum income requirements, signing up for internet-only banking. My money went round in a circle of standing orders, and I pocketed a nice chunk of interest each month. Ta very much.

But no longer.

From May, the interest you can earn has dwindled to less than a third of payments previously possible!

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Before: chunky interest

Current accounts used to be a nice little earner for my emergency savings.

Back in the heady days of 2016, it was possible to earn a healthy £1,265 a year in interest.

Set up the accounts, sit back, and see the interest payments pour in:

• £600 interest on £20,000 in a Santander 123 current account at 3%
• £200 interest on £5,000 in a Club Lloyds current account at 4%
• £150 interest on £5,000 in a Bank of Scotland Vantage current account at 3%
• £125 interest on £2,500 in a Nationwide Flex current account at 5% (for first year only)
• £100 interest on £2,000 in a TSB Plus current account at 5%
• £90 interest on £3,000 in a Tesco Bank current account at 3%

Total: £1,265

On savings of £37,500, that worked out as 3.4% a year, far better than the rates on ordinary savings accounts.

Even better, the Personal Savings Allowance introduced in April 2016 meant you could pocket £1,000 a year in interest totally tax free, as a basic rate taxpayer. Even higher rate taxpayers could earn £500 a year untouched by the tax man.

Now: shrunken interest

Since then, a rash of rate cuts have seen these tempting rates topple. Over the years Santander also hiked up the monthly fee on the 123 current account, from £2 to £5, while TSB slashed the balance that could earn interest from £2,000 to £1,500.

Back in February, only the 5% interest offered on the Nationwide Flex account remained untouched – although that rate only ever lasted for a year, before diving to 1%.

From 5 May 2020, total interest earnings slumped below £400 a year – less than a third of the interest possible in the glory days:

• £200 interest on £20,000 in a Santander 123 current account at 1%
• £60 interest on £5,000 in a Club Lloyds current account, at 1% up to £4,000 and 2% on £4,000 to £5,000
• £60 interest on £5,000 in a Bank of Scotland Vantage current account, at 1% up to £4,000 and 2% on £4,000 to £5,000
• £30 interest on £3,000 in a Tesco Bank current account at 1%
• £25 interest on £2,500 in a Nationwide Flex current account at 1% after the first year
• £22.50 on £1,500 in a TSB Plus current account at 1.5%

Total: £397.50

On a total balance of £37,000, that works out at just over 1%. Sad times.

Now, from December, the interest earnings will be even lower. By then TSB and Tesco Bank will have removed interest altogether.   The rate on Santander’s 123 account has drooped to 0.6%. Lloyds and Bank of Scotland will have reduced rates on the relevant accounts to 0.6% on the first £4,000 and 1.5% on the next grand up to £5,000. 

Even the stalwart Nationwide Flex account now only offers an introductory rate of 2% on a lower balance of £1,500, dropping to 0.25% after a year. 

The meagre annual interest payments have shrunk to:

• £120 interest on £20,000 in a Santander 123 current account at 0.6%
• £39 interest on £5,000 in a Club Lloyds current account, at 0.6% up to £4,000 and 1.5% on £4,000 to £5,000
• £39 interest on £5,000 in a Bank of Scotland Vantage current account, at 0.6% up to £4,000 and 1.5% on £4,000 to £5,000
• £3.75 interest on £1,500 in a Nationwide Flex current account at 0.25% after the first year

Total: £201.75 – halving in just a few short months.

On a total balance of £31,500, that works out at 0.64%. Sob. 

Where now?

With high interest current accounts dead and buried, where else can savvy savers turn?

Check best rates currently available at Savings Champion

If the short term, the shrunken rate from Nationwide pays 2% on up to £1,500 in a Flex current account, although it only lasts for a year.

Even better, if you’re willing to switch an existing current account to Nationwide, find someone who’s already a customer so you can earn £100 via the refer a friend scheme (I’ll suggest me – bung me an email on hello@muchmorewithless.co.uk so we can both earn £100). You’ll need to click through a referral link and use the Current Account Switch Service, which closes the old account.

Personally, I shovelled my emergency savings over into a Marcus by Goldman Sachs account. Sadly after several rate cuts, from Sept 22 I will only earn 1.05% a year  on up to £250,000. It’s a nice simple online account that can be opened with as little as £1, without any faffing around with direct debits and minimum monthly payments, but even more sadly it shut to new customers back in June. Nowadays, you can only opt for a fixed-rate bond for a year at 0.7%.

Back in January, inflation hit 1.8%, higher than the interest available. That meant cash stashed in bank accounts wasn’t keeping up with inflation. My balance was actually losing value, compared to rising prices.

The latest figures for August actually showed inflation dragged down by coronavirus to just 0.5%, so my savings are actually doing better in comparison. I’m trying to see that as a silver lining, through gritted teeth.

I know I need to keep some cash savings available for emergencies. But otherwise, I’m still shovelling money I can afford to set aside for at least 5 years into the stock market. Paying into a pension means you also get free money added by the tax man and (for a work pension) your employer. Yes, the stockmarket looks rocky for the foreseeable future, but I can’t see any other way to avoid losing money in supposedly ‘safe’ bank accounts.

Previous post: Are you losing money on your savings?

Now – over to you. Did you use current accounts to earn decent interest? What are you doing now rates have fallen further?