High Interest Current Accounts Could Become Less Attractive

Written by Karen Bryan

green piggy bankUpdate 21 August 2016 – My fears were well founded. With the rate of interest paid on the Santander 123 current account due to fall from 3% to 1.5%, it’s likely that other high interest current account providers will also take the knife to their rates.

The outlook for UK savers is dismal.

With the rate of inflation beginning to pick up, and talk of a cut in the Base of England Base Rate, it could soon to be hard to achieve a real return (when the rate of interest paid after tax on savings is higher than the rate of inflation).

I heard a rumour this morning that Santander is planning to cut the interest rate, paid on balances between £3,000 to £20,000, in their 123 Current Account, from 3% to 2%. To be honest. I’ve been expecting something along these lines to happen for some time.

If the rate of interest pad on the Santander 123 Current Account is cut, it could well lead to other banks cutting the interest paid on their high interest current accounts e.g. the Lloyds Club Current Account pays a variable rate of 4% on balances between £4,000 to £5,000 and the TSB Classic Plus Current Account pays a variable rate of 5% on balances of up to £2,000.

Perhaps the fact that the balances on which the high rate of interest is paid are much lower on most of the other high interest current accounts, may mean that the rates of interest are maintained.

High interest current account can also tighten the eligibility criteria to reduce the number of customers who qualify to receive the highest rates of interest.

At present, I am earning a variable rate of 3% on balances between £3,000 to £5,000 in a Bank of Scotland Current Account with Vantage. The only requirement is to pay in at least £1,000 a month into the account. However, from 2 September 2016, interest will only be earned if I pay out two direct debits per month from this account. As I have three of these current accounts, I don’t have enough direct debits to go around.

I can’t see any good replacement accounts for the cash currently in my Bank of Scotland with Vantage Current Accounts. The best rate for instant access savings accounts is around 1.3%. Even if I tie the money up for five years. the highest rate is 2.2%.

If the cut in the rate of interest paid on the Santander 123 Current Account materialises, earning 2% will still be competitive, so I’d keep my money in that account.

Interest rates correct on 27 July 2016.