Co-operative Bank launches 7% regular saver – but is it worth opening?

The Co-operative Bank has launched a new regular savings account offering 7% AER, just days after Coventry Building Society agreed outline terms to buy the provider.

Only two other providers – First Direct and Skipton Building Society – offer interest this high, but there are caveats to watch out for and the generous headline rate shouldn't be taken at face value.

Here, Which? takes a closer look at The Co-operative Bank's eye-catching deal and how it compares with the rest of the market.

What does the Co-op's regular saver offer?

The Co-operative Bank's Regular Saver offers a rate of 7% AER rate. During the 12-month term, you can access your money any time you want, whether that’s online, through the mobile app, by telephone or in a branch.

Any UK resident over the age of 16 can open the account with as little as £1 and – unlike many regular savings accounts – there's no monthly minimum deposit.

However, there are a lot of other terms you'll need to stick to. For starters, the account is only open to existing current account customers. You're also restricted to paying in a maximum £250 per month. If you deposit more than that, any amount over the limit will be returned to you. 

When the 12-month term is up, all remaining funds, including interest earned ,will be automatically transferred into a Smart Saver instant access account. The current rate, however, is a measly 1.81% AER. So you will need to make sure you set a reminder and make plans to switch to an account paying better returns.

• Find out more: how regular savings accounts work.

Interest isn't always what it seems

The savings rate of 7% AER certainly sounds impressive, but you may be disappointed to find your actual returns are much lower. That's because of the way regular saver accounts work in practice.

The limit placed on how much you can pay in each month, means you'll only earn interest on relatively small sums of money for most of the year.

For example, if you were to save the maximum £250 a month into this account, the total amount after a year will be £3,000. With interest of 7%, you might assume that your money would therefore grow by £210. But because the savings pot is building slowly, you’d actually only make almost half that amount (£114) after 12 months.

If you are able to invest a lump sum, then you'd probably be slightly better off opening a high interest fixed-term account. If, for instance, you were to make an initial deposit of £3,000 into the average one-year fixed-term deal paying 4.6%, you'll earn £138 in interest.

• Find out more: best savings accounts.

What are other regular saver accounts offering?

Despite these restrictions, regular savers can be great for those who don't have much cash saved already, but want to build up their savings while getting a decent return on their money.

If you are looking for a regular savings account that's open to all UK residents over the age of 16, then 7% is the highest rate on the market. The Co-operative Bank isn't the only provider offering it, though – products from both First Direct and Skipton Building Society also pay the same rate. 

So how do the three accounts measure up when it comes to other terms and conditions? The table below shows, at a glance, how they compare:

If you want to take advantage of one any of these top deals, there are a few caveats. Both The Co-operative Bank and First Direct require you to open a current account first, while Skipton will only allow existing members. The building society doesn't offer current accounts, so you'll need to have either a mortgage or another type of savings product. 

All of the accounts run for 12-months, but only The Co-operative Bank allows savers to make withdrawals during that time, without penalties such as loss of interest. It also doesn't require customers to deposit a minimum amount every month.

The downside of The Co-operative Bank deal, however, is that the rate is variable. This means the bank can change the amount of interest paid whenever it wants, usually in response to a fall in the Bank of England's base rate. First Direct and Skipton's accounts are fixed for a year, however, so you'll be guaranteed the 7% rate until the term is up.

• Find out more: how to switch your savings account.

Should savers worry about a possible buy-out?

Last week, it was announced that Coventry Building Society has agreed outline terms to buy The Co-operative Bank. The exact terms of the deal are still to be confirmed and at this stage it isn't guaranteed to go through.

If it does happen, The Co-operative Bank account holders will be gradually moved across to Coventry Building Society, but the process is expected to take several years.

It's likely that more details will be published as and when the deal is confirmed, but at the moment The Co-operative Bank account holders don't need to do anything. 

Steve Hughes, the chief executive of Coventry Building Society, reassured customers that: 'The Co-operative Bank is a financially stable, profitable organisation with a shared heritage and products and services that complement our own.

'We’re confident that we have the people, capability and the financial strength to bring both organisations together successfully over a number of years.'

• Find out more: Coventry Building Society agrees to buy The Co-operative Bank, so what it means for customers.