Updated: 23/2/2012

If you want to make the most of your savings and get a regular income from the interest you earn on them, then a monthly saving account is for you. Read on to find out exactly how they work, and which ones the Moneymagpies think are the best.

• What are monthly interest accounts?
• Who should get one?
• What to look out for
• Which ones are the best?

What are monthly interest accounts?

Monthly interest accounts are savings accounts which, as the name suggests, pay interest monthly rather than annually or when the account matures.

They act as a sort of ‘quick fix’ – if you want to start making some interest on your hard-earned cash as quickly as possible, then this is the best way to do it.

Obviously the more money you save in the account, the more interest you stand to earn each month. Most have a minimum deposit of just £1 though, so even if you can only afford to put a bit away, you should be able to find an account to suit your needs.

There are loads of different types of monthly interest accounts out there, so it’s a question of choosing which kind is the best for you.

Some are flexible and instant access, so you can withdraw money whenever you want. Others may penalise you for withdrawals – which might mean you lose a big chunk of interest – so it’s a good idea to check their terms and conditions carefully.

Some are online accounts which means that while theoretically they are instant access, you won’t have a method by which you can directly withdraw money. This means in practice, you’ll need to allow a few days to transfer it to another account so you can withdraw it.

Most are no notice accounts, but some do require notice, which means you’ll have to give the provider advanced warning before you withdraw money to avoid being penalised.

Essentially, these accounts sacrifice the very best rates to give you the flexibility to move your money around and the added benefit of getting your hands on the interest quickly.

Who should get one?

In order to get the full benefit from a monthly interest savings account you should aim to have a fairly decent sum of money you’re prepared to put away.

Remember that these accounts offer variable rates of interest, so if it’s stability you’re after, and you know you won’t touch your money, you should go for a fixed rate savings account.

If you want to save regularly, and don’t have a lump sum to put away at once, you’ll be better off with a regular savings account.

There are two main reasons to have a monthly interest savings account:

1 – To supplement your income

An account that pays out monthly allows you to enjoy the income without taking a chunk out of your savings. Perfect if you want to supplement a pension and no longer need to rely on long-term high interest savings, or if you’ve got some savings you want to put to good use.

2 -To have a handy safety net

If you have some savings, and are self-employed for instance, a monthly savings account could be a good safety net. You can earn interest on your interest which is always good, but know that if you do need some extra cash, the interest is there to use, and you haven’t eaten into the savings themselves.

What to look out for

Interest rates

OK, we’re going to attempt a short explanation of AER and gross rates of interest in an effort to help you understand what to look for – hold tight!

If you want to keep the monthly interest in your account, and therefore make interest on your interest over the year, you should look at the AER (Annual Equivalent Rate) because it takes this ‘annual compounding’ into account.

If, however, you plan to use your interest as an income and have it paid into another account each month, you should study the gross rate – which just calculates the flat rate of interest paid.

So, when you’re looking at monthly accounts, the AER should be a little higher than the gross rate to reflect this difference.

If that’s all hugely confusing, just remember to always compare like-for-like.

Sneaky small print

Make sure you find out whether the rate of the account includes an introductory bonus. It’s fine if it does – take advantage of it while you can – but move your money as soon as the deal decomes uncompetitive.

You should also check the withdrawal limits and penalties. Some accounts will limit the amount of times in a year (or other fixed period) that you can make a withdrawal before being penalised.

Others will simply deduct all your monthly interest for making one withdrawal, so check carefully to know exactly what you can and can’t do, and choose an account appropriately.

Which ones are the best?

Here are our current top picks:

Saffron BS e-saver Issue 5

• Interest Rate – 2.50% gross AER
• Minimum Deposit – £10
• Maximum Deposit - £2,000,000
• Interest is paid annually on 31 December or monthly on the last day of each month.
• Instant Access? – Yes - access online 24/7

Monmouthshire BS Income Generator

• Interest Rate – 2.53% AER/2.50% gross monthly
• Minimum Deposit – £5,000
• Maximum Deposit – £500,000
• Interest is paid monthly at the end of each month and must be paid into another bank account – meaning you cannot earn interest on your interest
• Instant Access? – Yes, but subject to 90 days’ notice or 90 days’ loss of interest

You must maintain a minimum account balance of £5,000 otherwise the account will be closed.

FirstSave 90-Day Notice

• Interest Rate – 2% above the Bank of England base rate
• Minimum Deposit – £100 (to get interest paid annually); £5,000 (to get interest paid monthly)
• Instant Access? – No
• Interest can be paid monthly or annually into the notice account or another nominated account.

This account is best suited for those who do not require instant access to their money and can sacrifice a bit of flexibility in order to benefit from higher rates of interest.

Useful Links

• West Bromwich No notice saver direct 2
• Monmouthshire BS Income generator
• FirstSave Accounts