Are current accounts the new savings accounts?

At the end of last year a spate of rate cuts on current accounts suggested the era of high interest current accounts was over. Now a move from Tesco Bank could mean the end for savings accounts.

For several years now if you wanted the best interest rate on the market you opened a current account. Interest rates of up to five per cent blew standard savings accounts out of the water.

But, in order to get that rate you often had to close your old current account and set up direct debits from your new current account. This meant for many the high interest rate remained a perk of their current account, rather than a dedicated savings account. That has now changed.

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Last week Tesco Bank announced that it would be paying at least three per cent interest on its current account until 2019.

Not only that but there are no catches: no direct debits needed, no closing of other current accounts, no minimum monthly deposit. Just a current account paying three per cent on all balances up to £3,000.

“We recognise that we live in a time of uncertainty, where our customers are working hard to get as much value as possible from their money, and so we are taking a step that demonstrates we put our customers first,” says Benny Higgins, Tesco Bank’s chief executive officer.

“With our unique guarantee, we are offering Tesco customers peace of mind that they will make a return on their hard earned money.”

Because it has none of the typical current account requirements you can use the Tesco account as an instant-access savings account offering a market busting three per cent interest. In contrast, the best rate you can get on a traditional instant-access savings account is 1.1 per cent from RCI Bank.

In fact, Tesco Bank’s interest rate beats anything available on the traditional savings market. The best rate possible is 2.05 per cent from Atom Bank, and you would have to lock away your money for five years to get that.

That means if you have less than £3,000 in savings the best possible home for it at present is in a current account.

You can either go for minimum hassle and a three per cent return from Tesco Bank. Alternatively, you can earn five per cent interest on balances of up to £2,500 with Nationwide – but you must pay in at least £1,000 a month.

Even if you need a home for more than £3,000 you should still consider current accounts over savings accounts, you’ll just need to spread your money around a little.

Put £2,500 in the Nationwide account, £1,500 in TSB’s Classic Plus account paying three per cent (you must deposit at least £500 a month), and £3,000 in the Tesco account. Satisfy the monthly funding requirements on the first two accounts by setting up direct debits to bounce the money between the two accounts.

That’s £7,000 earning market-beating interest in current accounts. Given the average savings balance is between £1,000 and £5,000 depending on who’s figures you use, most of us simply don’t need traditional savings accounts anymore.