/ Money

Is it time to ditch your traditional savings account?

Interest rates on traditional savings accounts are now so poor that many of us are deciding to choose alternative homes for our money. But is it really time to turn our back on them altogether?

Earlier this month, I appeared on Channel 4’s Dispatches programme, which investigated the struggle that savers are facing to secure a decent deal for their cash.

Much of the programme covered ground that Which? has been reporting on for years – poor communication about rate changes, savage cuts from the biggest institutions and how banks fail to describe the protection your savings are given.

Despite our efforts, and programmes such as Dispatches, savers on the whole remain in a state of paralysis – settling for poor rates in exchange for the convenience of housing their savings with their bank account provider.

But as sad as it is to see that this simple market is still malfunctioning, you can beat the banks by looking elsewhere.

Looking elsewhere for better savings rates

For years now, non-banking brands have sought to get a foothold in the savings market, with the likes of the AA, M&S Bank, Sainsbury’s and Tesco offering accounts. But if you feel comfortable getting even further off the beaten track, you could pick up a better deal.

Punjab National Bank launched in the UK in 2007, and has gathered attention by paying 2% on its instant-access cash Isa, way ahead of its nearest rival. And RCI Bank – an offshoot of car manufacturer Renault – currently pays the best rate for normal easy-access savings accounts.

There are caveats. Punjab’s account can only be opened in one of its seven UK branches. And RCI Bank isn’t covered by the UK’s compensation scheme – it’s covered by the French equivalent, which protects the sterling equivalent of €100,000, currently £70,000. The UK scheme protects £85,000.

In the hunt for better rates, a passionate minority of people have now turned to peer-to-peer lending. This burgeoning billion-pound industry connects investors with those who want to borrow, paying almost double what you can get on the high street.

We’ve explained the risks and rewards, gathering customer satisfaction scores for the biggest services.

After years of misery and mistreatment by the old guard, now might be the time to turn your back on the mainstream for good.

Have you found alternatives to traditional savings accounts that are working well for you?

Comments
Profile photo of NFH
Member

For anyone with a mortgage, an interest-bearing savings account is a waste of time. Instead arrange for the balance of the savings account to offset the mortgage, so that you pay interest only on the mortgage balance less the balances of all current and savings account with the same bank.

It is financial madness to borrow money at one interest rate and simultaneously deposit money at a lower interest rate.

Profile photo of John Ward
Member

The present low returns make it particularly hard for people who are looking for a convenient, protected, low-risk, easily-accessible home for their first-call savings from a trusted financial institution. This includes many older people who are mortgage-free and need to keep a reasonable sum available for unforeseen expenditure and for whom lengthy notice periods or interest penalties on withdrawals would not be suitable. ISA’s, bonds, and other investment products are not advisable for this first tranche of people’s savings. I have read so many stories by older people who, out of desperation over low interest rates on regular savings accounts, have put far too much in higher-yield products only for things to go wrong and they need money in a hurry or the fund fails. Sometimes this is pure greed. Obviously, 2% will give you twice as much as 1% but if the capital amount is, say, £10,000 the difference is only £100 a year which does not offset the loss of access, withdrawal penalties, or lack of compensation. I think we should be encouraging people to think that ordinary savings accounts are absolutely the right place to keep a useful portion of your money before contemplating other less safe places.

Profile photo of malcolm r
Member

John, totally agree. Some seem to think we are entitled to high interest rates with no risk. If the banks and building societies don’t need our money they will not pay much for it.

However I do want the banks to tell us, with notice, when an account’s interest rate will change, and I would like to see bonus rates that expire after a year stop. All they seem to do is lure people in to an attractive account in the hope it will be overlooked when they then drop the rate – we all suffer from inertia, and that should not be exploited.

If you want a good place for money that is relatively easy to withdraw I’d suggest premium bonds. The effective interest rate is 1.35%, tax free. You might get nothing, or you might be lucky. But with savings rates around the same, and subject to tax, why not?

Profile photo of John Ward
Member

I agree with all that Malcolm. And with Premium Bonds you can get back exactly what you put in at any time which, in the current economic conditions, is perfectly respectable. And if you reinvest any winnings in more Bonds it’s a painless way to increase your savings. I’ve had the pleasure of a couple of wins this year on quite a modest holding – a 4% tax free return, so you never know your luck. I wouldn’t recommend too much in Premium Bonds, though – it’s still a gamble.

Profile photo of Paul Ryan
Member

On Premium Bonds, you might be interested in this story that we’ve done.

http://www.which.co.uk/news/2015/06/are-premium-bonds-worth-the-gamble-404722/

Profile photo of PeterRobson
Member

Just a warning that from the 1st January 2016 The UK bank guarantee will be cut from £85000 to £75000 as directed by the EU which could have ramifications for those people who have fixed term accounts. It is apparently due to the strength of the pound against the Euro

Profile photo of alfa
Member

The government needs to step in and still guarantee accounts that already have £85,000 in them.

Member
Alan says:
4 July 2015

The sooner we leave the EU the better.

Member
Michael says:
5 July 2015

Prior to having to comply with EU regulations the limit guaranteed was £2000. What do you think now Alan?

Profile photo of John Ward
Member

I think there is a presumption in government circles, justified or not, that people with free personal savings [as distinct from pension pots] of over £75,000 are either sufficiently knowledgeable or professionally advised to avoid the risks, or are in possession of such wealth that losing the excess over the bank guarantee limit is a calculated risk for them in the event of a default.

The higher the bank guarantee the more the banks have to provide in capital reserves in order to fund the guarantee if called in and this provision will not be so remunerative as other reserves so it ultimately reduces interest rates for savers elsewhere in the spectrum. Personally I consider the reduced guarantee to £75,000 is pragmatic and acceptable in present conditions with much greater regulation and better capital controls now in place for the banking sector since the 2007-08 crisis.

I endorse Michael’s response to Alan about the benefits to the UK’s citizens of EU membership.

Alfa is right to draw attention to the implications for accounts that are already over the £75,000 guarantee limit, but rather than see the government guarantee them I think it should ensure that banks are required to write to all such savers and advise them of the consequences of the change and recommend that they disperse their holdings [with the possibility of dropping any withdrawal penalties for a limited period]. People should also bear in mind that the guarantee covers the total of holdings in one bank or institution albeit that they might be spread among subsidiaries with different names [the banks need to make it clear to their customers which accounts are within their corporate entity for the purpose of this regulation].

Member
John H says:
15 July 2015

Michael,
Appreciate that Alan recognises that an independent UK can make whatever arrangements are appropriate to us. In the EU, we must do as we are told – as the Greeks are just finding out. Not only that, but the EU clearly wishes to damage the City and we must stand by, powerless, while our key industry is harmed.
Better off out.