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07 Aug 2024

New savings account offers over 10% AER - what's the catch?

Interest on Virgin Money's regular saver is five times the rate of inflation, but it might not be the right option for you

Matthew JenkinSenior writer

Virgin Money's new regular savings account offers an impressive 10.38% AER for the first year. But is it worth opening?

Currently the best deal on the market, the account certainly sounds appealing with providers already starting to slash rates following the Bank of England's recent base rate cut.

But, as with all regular savers, there are caveats to watch out for and the generous headline rate shouldn't be taken at face value.

Here, Which? explains the pros and cons of Virgin Money's account and reveals the other products that could be worth considering.

What does Virgin Money's regular saver offer?

The Regular Saver Exclusive boasts an interest rate of 10.38% AER - five times the current 2% rate of inflation. The rate is fixed until 31 July 2025, with interest paid quarterly.

However, there are a lot of terms you'll need to stick to.

Firstly, the account is only open to customers who've been with Virgin Money since 4 December 2019 or earlier, and those who originally opened a current account with Clydesdale Bank or Yorkshire Bank.

There are also restrictions on how much money you can add to your savings pot. While you don't need a minimum deposit to open the account, and there are no rules around how much you have to invest on a regular basis, the maximum you're allowed to save is just £250 per month.

If you don’t manage to save your full monthly allowance, however, you can overpay in future months - just as long as you don't exceed the overall annual limit of £3,000 (12 x £250).

Provided the restrictions don't put you off, a regular saver can be great if you want to save a relatively small amount each month while getting a decent return on your money.

Find out more: how to find the best savings account

Don't take the headline rate at face value

The 10.38% AER interest rate 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 you'd save that year would be £3,000. With a savings rate of 10.38%, you might assume that your money would therefore grow by £326.65 if interest was compounded monthly. (Compounding is when the interest that's paid into your pot accrues interest on itself over time, meaning your savings grow quicker.)

However, with this account, interest is compounded every three months rather than monthly, meaning you’d actually only make around half that amount (£162.40) after 12 months.

On the plus side, this still actually works out marginally better than investing a lump sum into a high-interest fixed-term account. If, for instance, you were to make an initial deposit of £3,000 into the best one-year fixed-term account, which currently pays 5.25%, you'd only earn £161.35 in interest after 12 months.

Find out more: what are the different types of savings account?

What are other regular saver accounts offering?

The table below shows the top rates for regular savings accounts:

Account	AER	Monthly deposit	Terms
Virgin Money Regular Saver Exclusive	10.38%	£0-250	12-month bond, interest paid quarterly, unlimited withdrawals. Existing customers only
Principality Building Society 6 Month Regular Saver	8%	£0-£200	6-month bond, interest paid at end of term, no withdrawals allowed
First Direct Regular Saver	7%	£25-£300	12-month bond, interest paid annually, no withdrawals permitted. Existing customers only
The Co-operative Bank Regular Saver	7%	£1-£250	12-month bond, interest paid annually, unlimited withdrawals. Existing customers only
Principality Building Society Triple Access Regular Saver	6%	£0-£50	12-month bond, interest paid each year on 1 January, only three withdrawals allowed per year

Source: Moneyfacts. Correct as of 6 August 2024, but rates are subject to change. Please note that the information in this article is for information purposes only and does not constitute advice. Please refer to the particular terms and conditions of a provider before committing to any financial products.

As you can see, the rate offered by Virgin Money's new regular saver is miles ahead of the competition - over two percentage points more than the next best deal from Principality Building Society. However, Principality is the only provider in the table that doesn't require you to be an existing customer to open a regular saver account.

It's worth knowing that, while the rates on the Virgin Money and First Direct accounts are fixed for a year, Principality Building Society and The Co-operative Bank's regular saver account interest rates are variable.

This means the bank can change the amount of interest paid whenever it wants - which will often happen following a change to the Bank of England base rate. Given this decreased from 5.25% to 5% last week, rate cuts are expected to slowly trickle through the savings market over the coming weeks. So if you see an account offering a high fixed rate now, it could be well worth considering.