Fewer customers are opting for regular savings offers despite interest rates of up to 8%

The best savings rates on the market are paid in regular savings deals, but people are turning their backs on the products and taking out bonds instead.

With a regular savings account, customers put aside a fixed amount every month and the interest is usually paid out after one year.

Nationwide’s latest regular saver pays 8 per cent, First Direct’s long-standing deal pays 7 per cent and Lloyds Bank pays 6.25 per cent – however the way the interest is calculated is complicated and means savers may not get as much as they think.

Take your pick: Savers seem to prefer long-term security to high interest rates

Despite these seemingly unbeatable interest rates, regular savers actually have less cash on hand today than they did a year ago, according to an analysis of Paragon Bank’s Caci data.

By the end of August 2023, Brits held £20.7 billion in regular savers, compared to £21.1 billion in the same period in 2022.

In comparison, there is a massive £528.1bn in easy access accounts, £258bn in fixed-term business such as bonds and £118bn in premium National Savings and Investments (NS&I) bonds.

Although banks strongly encourage regular savings, the biggest savings trend last year was consumers signing fixed-term contracts, Paragon Bank said.

Savers now hold £258bn in fixed-term contracts, up from £130bn in the same period last year and an increase of 98 per cent.

Fixed interest ISA balances rose from £76.5bn to £138.8bn in the 12 months, an increase of 81.5 per cent.

The best fixed rate bond from NS&I pays 6.2 per cent interest per annum and the best fixed rate bond Isa from Shawbrook pays 5.83 per cent.

But despite these lower interest rates, savers appear to be turning to fixed-term contracts in droves, pushing regular savers into the background.

Paragon Bank savings director Derek Sprawling said: “The change in the savings market over the last 12 months has been unprecedented.”

“We have never seen so many switches to fixed interest options and new account openings, particularly in the Isa market segment.”

“Recording a 98 per cent increase in overall fixed interest balances and a more than doubling of the amount held in non-fixed Isa options will have transformed saving habits in the years to come.”

“Our experience shows that savers who hold money in a fixed-rate account typically convert that money to a new fixed-rate account when it matures.”

Why don’t customers want regular savers?

Despite their currently high tariffs, regular savings offers have historically been a niche savings offer.

Typically the products limit consumer savings to less than £500 per month, sometimes as low as £150. A withdrawal within the one-year term tends to result in a complete loss of interest.

In times of economic uncertainty, the certainty of a guaranteed level of interest from a fixed interest transaction such as a bond or ISA can also be attractive, coupled with the feeling that savings rates could start to fall if the Bank of England cuts the base rate.

The key interest rate, which the Bank of England held at 5.25 percent last month, is factored into people’s savings rates.

Another reason why consumers are turning away from regular savers could be that the interest rates on these offers are not what they think at first glance.

For example, with the UK’s top interest rate, customers can deposit up to £200 per month from Nationwide’s regular saver, for a total interest rate of £2,400 per year.

If you put £2,400 into an easy access account and pay 8 per cent a year, that would mean interest of £192.

But the maximum a saver can earn on the Nationwide deal is £104 – which means an underlying interest rate of 4.25 per cent rather than 8 per cent.

The reason lies in the unique way interest is calculated for regular savers, with savers only receiving the main interest rate for one month of the year and a fraction of that for the remaining 11 months.