Best home for your savings may be a bank you’ve never heard of

With interest rates across the market being slashed to near zero, the nation’s savers are urged to embrace providers and companies they may never have considered before. These include Sharia banks, brands they have never heard of and digital banks which should offer better returns from their combined £1.7trillion cash pile. 

Otherwise, the millions of people who rely on cash savings to fund their twilight years have limited, poor-paying options. 

A decade ago, with the economy still grappling with austerity and fallout from the financial crisis, the average instant access savings account paid 0.79 per cent. Today, high street banks are disgracefully paying just 0.01 per cent on such accounts – equivalent to a tenth of the Bank of England’s base rate of 0.1 per cent. 

Offer: Pakistani bank UBL pays 1 per cent but the rate is variable

Interest rates on all types of savings accounts have tumbled since the start of the year. From January to the end of last month, rates fell by between 26 and 46 per cent, according to rate scrutineer Savings Champion. 

But it’s about to get worse. A week on Tuesday, many customers of Government-backed National Savings & Investments will suffer savage rate cuts. For example, Income Bonds, which now pay monthly interest, will pay a new interest rate of 0.01 per cent a year – down from 1.15 per cent. Overnight, the account will go from market leader to market trailer. 

Anna Bowes, co-founder of rate scrutineer Savings Champion, says: ‘It’s a desperate situation for savers, especially given that NS&I Income Bonds traditionally offered some protection from the savaging of rates industry wide.’ 

NS&I’s Direct Isa interest rate will also fall – from 0.9 to 0.1 per cent – while Direct Saver will pay 0.15 per cent instead of 1 per cent. The rate on the Investment Account will reduce from 0.8 to 0.01 per cent. From next month, the odds of winning a prize from Premium Bonds will worsen from 24,500 to one – to 34,500 to one. 

Katie Brain, of financial research company Defaqto, says: ‘Savers will need to consider moving their money to providers they may not previously have heard of to get the best rates.’ Shopping around, she says, still pays – especially for fixed-term savings. 

Based on a £10,000 deposit, the difference in interest earned from the best one-year bond compared to the worst is £100 versus £1. 

Bowes says: ‘Don’t deposit your money with high street banks – there are better rates elsewhere. Although you might need to choose a brand name you’ve not heard of before, you can do so safely.’ 

‘Safely’ means using banks that are protected by the Financial Services Compensation Scheme – which guarantees deposits of up to £85,000 per person, per bank or building society should an institution fail. 

For one-year, fixed-rate bonds, the best accounts paying 1 per cent or more come from Tandem, Zopa Bank, OakNorth Bank and United Trust Bank. All are protected under the compensation scheme but must be opened online. 

Pakistani bank UBL pays 1 per cent on its 35 and 90-day notice accounts but the rate is variable. Accounts can be opened in one of its branches (located in Birmingham, London and Manchester) or by post. 

The top easy-access accounts are paying 0.75 per cent and are offered by Gatehouse Bank and Atom Bank. The former is a Sharia bank, which uses money in a way that satisfies Islamic law. Returns are based on ‘expected profit rates’ rather than interest rates and are not guaranteed. Atom Bank is accessed via an app on smartphones or tablets. 

Credit unions could provide a lifeline to struggling savers. They are mutually owned by their members, have a high street presence for those who can’t bank online and are protected by the Financial Services Compensation Scheme. Often, they pay a dividend – a share of any profit the union has made – rather than a fixed interest rate. 

Birmingham-based Advance Credit Union has an annual dividend payment history of 1 per cent every year since 2015. There is no guarantee the same dividend will be paid this year but savings up to £18,000 are allowed. Manchester Credit Union also says it typically pays a 1 per cent dividend. However, London Mutual Credit Union says it has not made a surplus in recent years so no dividend has been paid. To find a nearby credit union and learn more visit: findyourcreditunion.co.uk. 

Meanwhile, building societies often allow accounts to be opened and managed by branch or post. This helps people who cannot or won’t rely on a computer or a relative to help them. 

Loughborough pays Isa savers 0.8 per cent interest, fixed for one year, while Newcastle pays 0.75 per cent on a one-year, fixed-rate bond – accounts with the latter can only be opened in a branch. Principality pays 0.85 per cent, fixed for two years, and the account can be opened in branch or by post. 

Savers need to act quickly because new fixed rate bonds are often withdrawn soon after launching. Bowes says: ‘It’s a case of grab what you can, when you can.’ 

For best-buy savings rates, visit rate-checking websites such as savingschampion.co.uk and moneyfacts.co.uk. 

One final thought. According to asset manager Janus Henderson, £1.2 trillion of UK householders’ cash savings is earning minimal interest – and isn’t needed as a security buffer by households for financial emergencies. Thus savers are advised to consider investing some of this in the stock market.

Kirsty Stone, a chartered financial planner from independent adviser The Private Office, says: ‘Establish what your cash buffer should be, then think about investing. If in doubt, speak to a professional.’ 

She adds: ‘It can be daunting to put money into the stock market. But if invested in a diversified way, it should be a much smoother ride than what people may think from watching the news.’ 

For help in finding a financial adviser use a website such as unbiased.co.uk or The Personal Finance Society’s tool at thepfs.org/yourmoney/find-an-adviser.  

This post first appeared on Dailymail.co.uk