Is your money best off in smaller savings accounts?Which? suggests what savers should look out for
12 June 2015
With so many savings accounts offering pitiful rates, consumers may have to look to smaller providers to get decent returns.
Some of the best rates featuring in the Which? Money Compare tables are offered by newly-formed, smaller or foreign financial institutions looking to take on the UK’s largest banks.
For example, Newcastle Building Society’s Big Home Saver (Issue 3) currently tops our instant-access table with an AER of 2.02% before tax, while Punjab National Bank continues to offer a range of table-topping cash Isas.
Meanwhile, French car manufacturer Renault’s finance arm, RCI Bank, recently launched a competitive instant-access account. Its Freedom Savings Account, which offers savers 1.5% AER with no fees and a starting balance of just £100, is currently only available directly through its website or to users of comparison website MoneySuperMarket.
Here, we explore what to bear in mind if you decide to invest money in these or any other ‘challenger banks’.
Find out more: How to find the best savings account - what type of account is best for you
A lot of challenger banks are attempting to break the dominance of traditional banks with exceptional customer service.
Metro Bank, the UK’s first new bank in more than 150 years, is open seven days a week. First Direct, while it has no branches of its own, offers a 24-hour call centre service. Most of the savings providers topping our customer satisfaction tables are smaller institutions.
However, many of these challenger banks offer limited methods of managing your money. To open an account with Punjab National Bank, you’ll have to visit one of its seven UK branches, for example.
The Which? Money Compare tables let you search hundreds of savings accounts and Isas from providers large and small to find a great savings rate based on quality of service as well as cost and benefits.
Which? Money Compare table – Savings and Isas – hundreds of accounts compared
Is your money protected?
Despite the attractive rates, some customers may be reluctant to trust their money to these new challengers.
Yet the majority of challenger banks, just like the traditional high street banks, are covered by the Financial Services Compensation Scheme (FSCS). This means your savings are protected by the government up to £85,000 if a financial institution goes bust.
If you have more than £85,000 in savings, it’s worth spreading your funds across different financial institutions to ensure your cash is protected.
If investing with a foreign institution, double-check your savings are covered by the FSCS or a similar international compensation scheme.
Find out more: Who owns who in the savings market? – what banks are part of the same institution
Peer-to-peer lending: a safe alternative?
Peer-to-peer lending is another option you could consider for your savings.
Websites such as Funding Circle, Ratesetter and Zopa match savers who are willing to lend their cash to individuals or small businesses wanting to borrow.
By cutting out the middle-man, the rates on offer can be better than those offered by banks but the deal comes with added risk, namely that the websites aren’t covered by the FSCS.
There’s also a bigger risk of borrowers failing to pay back the money they owe, although most major peer-to-peer websites have schemes to compensate customers in this scenario.
Which? has rated the UK’s three biggest peer-to-peer lending sites - Funding Circle, RateSetter and Zopa – on a number of factors including rates, security and ease of use.
Find out more: Peer-to-peer lending websites – see our in-depth reviews
Which? Limited is an Introducer Appointed Representative of Which? Financial Services Limited, which is authorised and regulated by the Financial Conduct Authority (FRN 527029). Which? Mortgage Advisers and Which? Money Compare are trading names of Which? Financial Services Limited.