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Should you save in a current account?

Which? explores pros and cons of current account savings

Current accounts offer up to 5% AER on positive balances 

Current accounts are providing a popular alternative to traditional savings products, according to new research. 

A survey conducted for Nationwide Building Society suggests 45% of people are using current accounts to build up their savings pots. 

These accounts pay up to 5% AER on positive balances, while some offer cashback and switching incentives to entice new customers.  

However, there are typically a number of restrictions and conditions to meet in order for interest to be paid out.  

Here, we explore the pros and cons of storing your savings in a current account.

Find out more: Bank account reviews – more than 70 current accounts rated 

Pros and cons of current account savings

Many current accounts offer a higher interest rate on in-credit balances than any instant-access savings account or cash Isa. However, the maximum balance on which you can earn interest is much lower.

For example, Nationwide’s FlexDirect account pays 5% AER on balances up to £2,500 in the first year, dropping to 1% AER thereafter. TSB’s Classic Plus Account pays 5% AER on balances up to £2,000. Alternatively, savers with between £3,000 and £20,000 can earn 3% AER in Santander’s 123 account, although a monthly account fee of £5 applies.

These accounts, and many others, require customers to make a minimum monthly deposit in order for interest to be paid. Some also require customers to set up a minimum amount of direct debits.   

Read the terms and conditions of a current account carefully. If you’re unable to meet them, you won’t receive any interest for that month. In some cases, you’ll also have to pay a monthly fee. 

Find out more: How to make the most of multiple current accounts – boost the rate on your cash savings

Alternatives to current accounts

One in three savers (34%) use a cash Isa, while one in four (25%) use a taxable savings account, according to Nationwide’s research. 

The key advantage of a cash Isa is that you’ll pay no tax on your savings interest. However, there are limits on the amount of cash you can transfer into an Isa each tax year. In 2015/16, you can deposit a maximum of £15,240.    

Most taxable savings accounts have no limits on the amount of cash you can transfer in, and they pay interest on much higher balances than current accounts. However, you may have to pay tax on this interest. 

The Which? Money Compare savings and Isa tables let you search hundreds of savings accounts and Isas from providers large and small to find a great savings rate based on quality of service as well as cost and benefits.

Which? Money Compare table: Savings accounts and Isas – hundreds of accounts compared

Personal Savings Allowance to be introduced in April

From 6 April 2016, a new personal savings allowance will reduce the amount of tax that people pay on savings interest. It will allow savers to earn up to £1,000 in interest without paying tax, regardless of the type of account. 

For most people, this will boost the overall returns received from current accounts and taxable savings accounts. 

Flexible Isas, which allow you to withdraw and replace funds without it affecting your overall Isa allowance, are set to be introduced on the same day.  

Click the link to learn more about April’s savings changes.     

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Which? Limited is an Introducer Appointed Representative of Which? Financial Services Limited, which is authorised and regulated by the Financial Conduct Authority (FRN 527029). Which? Mortgage Advisers and Which? Money Compare are trading names of Which? Financial Services Limited.

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