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

But this week TSB announced it will be halving the rate paid on its Plus account. From May 2, interest on the TSB Plus current account will be slashed from 3% a year to 1.5%. This comes 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.

Sadly, these are 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.

Only the 5% interest offered on the Nationwide Flex account remains untouched – although that rate only lasts for a year, before diving to 1%.

Now from 5 May 2020, total interest earnings slump 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 £37,500, that works out at just over 1%. Sad times.

A few green shoots

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 you want a short term win, Nationwide does still pay 5% on up to £2,500 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’ve shovelled my emergency savings over into a Marcus by Goldman Sachs account. Even after the rate cut announced from March 20, it will still pay new customers 1.3% 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. I opened my account a while back, so will earn 1.40% after the rate changes.

The real problem is that inflation hit 1.8% in January, higher than the interest available. That means cash stashed in bank accounts won’t be keeping up with inflation. My balance will actually be losing value, compared to rising prices.

I know I need to keep some cash savings available for emergencies. But otherwise, I’ve been 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. 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?