Take a look at the best-buy tables for savings. What do you notice?
The top places are occupied largely by banks you have probably never heard of. Punjab National, RCI and Shawbrook are just three in a long list of little-known banks that can pay good rates on our money. You will not find Barclays or HSBC or RBS in the best-buy tables – they do not want our money.
But the newer banks – the so-called challenger banks – do.
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Is your money safe?
Despite their exotic names, most challengers are located in the UK. They are regulated by the Financial Conduct Authority and money deposited in them is covered by the Financial Services Compensation Scheme. That means that if the bank went bust – and I must stress there is no suggestion that any of them is likely to do so – your savings would be safe up to £75,000 and repaid by the scheme within a week or two.
Most best-buy tables have at least one Indian bank in them – Baroda, Punjab National, State Bank of India and Axis Bank all have their origins in that country.
The reason they can top our savings rates is simple. In their own country interest rates paid on savings are much higher – for example, 4.5% for instant access and 7.3% for a deposit lasting a year or more.
So offering us 2% or so is a cheap way to access money, which they can then lend out for loans and mortgages elsewhere in the world. The Indian bank rate is 9.15% and a mortgage can cost 11% or more.
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A smaller number of challenger banks are located in the European Economic Area (the EU plus a few other countries), such as RCI Bank in France and Fidor Bank in Germany.
They are covered by regulation in their own country and by their own compensation scheme. That means your money is protected up to the EU standard of €100,000, worth around £77,000 (every number in this article was inevitably written a few weeks ago and may not be current when you read it).
It also means if one of those banks went bust you would have to get your money back from the host country and it would be paid in euros. Again, the chance of these banks failing is remote.
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Spread your bets
If you have more savings than the £75,000 limit and want to be absolutely sure your money is safe then you can spread your money between banks to keep it below that level.
Remember that interest earned will slowly increase the amount you have in that account.
The limit applies to the money over all the accounts operated under one banking licence. For example, Halifax and Saga both come under one Bank of Scotland licence, so money in them is safe only up to £75,000 between the two.
Confusingly, Lloyds Bank – which owns Bank of Scotland – has a separate licence.
So you could have £75,000 in a Lloyds current account and £75,000 in a Saga account and both would be protected. Remember, too, that the £75,000 limit applies to individuals, so a joint account will be safe up to £150,000.
Newer and unusual bank brands are less likely to share a licence with another bank. Check who owns your bank by visiting which.co.uk and searching for ‘FSCS’.
If you have a great deal of money, then the Government savings organisation National Savings & Investments may be attractive. It will take deposits of up to £1 million or more in a single account and all that money is protected by the Government up to any amount. However, NS&I rates have all been cut this year and at 1% or less are nowhere near the best buys.
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Now the buts...
If you are looking for a new home for your money – perhaps in a cash ISA or a fixed-term savings bond – the number-one top rate is not always the best to go for.
Nowadays savings accounts have numerous conditions that you must beware of. For example, there may be an interest penalty if you take money out of the account. You may be allowed a small number of withdrawals a year but no more. Or you may have to give notice before you can withdraw money – even from an easy-access account.
You may also find that some banks and building societies allow only postal or branch applications. Finding exactly the account you want requires a bit more than just looking at who pays the highest interest rate.
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Do your sums
If you find a good cash ISA, do not assume that you can transfer money from other ISAs into it. Not all ISAs allow transfers in. And although ISAs can now be flexible – you can take money out and pay it back in during the tax year as long as you don’t exceed the £20,000 limit – not all ISAs allow that. Those that do are called Flexible ISAs.
Remember, too, that the first £1,000 interest on any account is always free of tax unless you pay higher-rate tax when it is £500. But non-ISA accounts may pay higher rates than ISAs. So they may be better for your money in the short term.
Current accounts can provide a better rate than any savings account. Santander’s 123 Current Account, for example, pays 3% on the balance up to £20,000 (rates are lower if you have less than £3,000) but there is a £5 a month charge. It is a current account, not a savings account, and each month you must pay at least £500 in and have at least two monthly direct debits from it.
Other current accounts pay a higher rate of interest but on less money. TSB and Nationwide pay 4.89% but on amounts limited to £2,000 and £2,500 respectively.
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Finding the best
There are many league tables of best-buy savings accounts including moneysupermarket.com, savingschampion.co.uk and moneyfacts.co.uk. Sometimes the choice is so great it can be confusing and it can be surprisingly hard to find out which is the actual best buy. Some listings are influenced by commercial deals and sponsorships.
It may be that you are happier with a tried and trusted UK name for your savings. But whatever you do, finding the best home for your money may take a bit of research.
Check each firm is regulated in the UK or EEA and which compensation scheme applies. And always read the conditions very carefully to make sure you are happy with any restrictions.
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