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Savings rates are in the doldrums. But did you know you can now earn 3% interest? Here’s how

Savings rates are in the doldrums. But did you know you can now earn 3% interest? Here’s how
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If you’re looking for a home for your cash, there’s no denying that times are tough. Savings rates are derisory across the board, with some easy access accounts now paying as little as 0.01%.

While other easy access accounts are a tad more competitive, they all pay way below the current rate of inflation. But did you know that there is one way to earn over 3% interest on your savings? Here’s how.

Why are savings rates so low?

Before I explain how to earn over 3% on your savings, let’s look at why savings rates are so low.

The Bank of England controls monetary policy in the UK, and its base rate massively impacts savings rates. To put this into layman’s terms, a low base rate makes borrowing cheaper. This means that banks don’t need to work hard to attract retail savers. As a result, a low base rate typically means low savings rates.

In contrast, a high base rate makes borrowing more expensive. This means banks have to fight with each other to attract deposits. Consequently, a high base rate encourages banks to offer higher interest rates.

The Bank of England base rate now sits at 0.1% – an all-time low – following a reduction from 0.75% in March 2020 due to the pandemic. A similar reduction in the base rate occurred in 2016, following the result of EU referendum. On that occasion, the Bank of England cut its rate from 0.5% to 0.25%.

To put these recent cuts into content, the base rate sat above 5% prior to the 2008 financial crash, when savings rates were far, far more generous. 

What do the top-rated easy access accounts pay?

While savings rates on normal accounts are in the doldrums, it’s still worth moving your money to get the best interest rate you possibly can.

Right now, Aldermore Bank has an account paying 0.6% AER variable interest. However, you can only make two withdrawals per year. If that’s not for you, then Tesco Bank offers an easy access account paying a slightly lower 0.59% AER variable interest, with no withdrawal restrictions.

If you’re happy to lock your cash away, savings rates on fixed-term accounts are a tad more generous. Atom Bank pays 1.5% AER variable interest if you’re willing to put your cash in a one-year fixed account. Alternatively, Atom pays a higher 1.75% if you can commit to locking your savings away for two years. 

For more options, see our list of the top-rated easy access savings accounts, and the top-rated fixed savings accounts.

How can I earn 3% or more on my savings?

While savings rates on normal savings accounts are low, it is possible to earn over 3% interest on your savings.

If you have a NatWest or RBS current account, you can access a Direct Saver account that pays 3.04% AER variable interest. The account can be opened online, or via an app, and you can save up to £50 per month. It’s worth knowing that the headline interest rate is variable, so it could change at any time. Plus, you only earn this rate on the first £1,000 in the account.

Don’t have a NatWest or RBS account? The good news is that you can open a current account with either of these banks to qualify for the Direct Saver. As an added boon, if you switch to one of three RBS current accounts, you can bag yourself a switch bonus of up to £150.

Skipton Building Society member? If you’re a Skipton member, and you joined the building society on or before 16 August this year, you can open its Online Existing Member Regular Saver account paying 3.5% AER interest. The rate is fixed for one year, and you can save up to £250 per month. After a year, the account will be converted to an easy access account that will almost certainly pay a lower rate of interest. So be ready to move your cash after 12 months.

For more accounts, including options available to all, see our list of top-rated regular savings accounts.

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