Savings: why smaller banks are offering the best returns

Why smaller banks are offering the best returns

Savers who want the best rates should turn to smaller banks, according to new research.

Lesser-known providers such as Al Rayan Bank, Bank of Cyprus UK and Ulster Bank are outdoing the bigger players when it comes to savings, with rates as high as 2.55%.

On the whole, interest rates have risen on instant access savings accounts as well as two-and-five-year fixed deals compared to a year ago.

Figures from financial data site Moneyfacts reveal that the best deals on easy access accounts have risen from 1.2% to 1.25% and the best five-year fix has jumped from 2.08% to 2.51% over this period.

But even though smaller banks offer better rates, none can match the current rate of inflation, which jumped from 2.6% to an unexpected 2.9% in August.

What's more, the Bank of England Base Rate has been held at 0.25% yet again, meaning that relatively poor savings rates are set to continue in the short-term at least.

So, where should you put your cash? Before we reveal the top deals, it's worth flagging up two key recent developments that should change the way you think about savings.

A new savings landscape

The first is the Personal Savings Allowance (PSA).

Launched in April 2016, the PSA allows basic rate taxpayers to earn up to £1,000 and higher rate taxpayers to earn up to £500 in savings interest tax-free. Additional rate taxpayers do not have a PSA.

This means instant access, notice and fixed-rate bonds are now far more lucrative as providers will stop taxing savings interest at source.

The second change is the dramatic rise of current accounts as a viable home for your savings.

While banks have traditionally offered terrible rates of interest on in-credit current account balances (and many still do!), some are luring new customers by offering rates that comfortably beat the best buy savings accounts.

And, as they're also included in the PSA, you get the same tax benefits to boot.

Let's look at all of these and more to see what rates you can get and where the best place to put your cash is.

Current accounts

As we've already mentioned, some current accounts offer inflation-beating rates. The downside is they have pretty miserly deposit limits, and increasingly require you to jump through a few hoops to qualify for the headline rate.

So let's take a look at the best.

Nationwide's FlexDirect account pays 5% interest on balances up to £2,500 for the first 12 months. The only condition is you need to pay in at least £1,000 a month.

TSB's Classic Plus account pays 3% on balances of up to £1,500, provided you credit the account with £500 a month.

The Tesco Bank Current Account also pays 3%, but this applies to balances of up to £3,000. To qualify, you'll need to pay in at least £750 a month and have at least three direct debits (not including Tesco Bank savings accounts).

Bank of Scotland's Classic Account with Vantage pays 2% on balances between £1 and £5,000 if you pay in £1,000 a month and have two direct debits set up.

Lloyds Bank is offering the Club Lloyds account, which pays 2% on balances between £1 and £5,000, as long as you credit the account with £1,500 a month and set up two direct debits from it.

If you don't want to spread your money around, Santander's 123 account pays 1.5% on balances of up to £20,000. You need to pay in £500 a month, and set up at least two direct debits.

There's also a £5 a month fee on the account but you can earn cashback on some of your direct debits for household bills, which can help cover that.

Now let's look at how traditional savings accounts fare. As we noted at the top, none of these can currently beat inflation, but they do allow you to deposit far larger sums than current accounts.

Instant access savings accounts

The top rate of interest on an easy access account is currently 1.25% which you can get from Ulster Bank. You only need £1 to open an account.

Notice accounts

If you give up access to your cash for 180 days you can get a rate of 1.65% from Secure Trust Bank, but you'll need a sizeable £1,000 to open it.

Cash ISAs

While the PSA has effectively made all savings accounts tax-free, you should still consider using your tax-free ISA allowance (currently £20,000 for 2017/18).

That's because any money you put into an ISA will stay tax-free long term, even if the interest you earn grows. With the PSA, any interest you earn beyond the £1,000/£500 limit is taxed at your marginal rate.

The best rate on an easy access ISA is available with Virgin Money. It's paying 1.06% on deposits from just £1.

Savers are normally only allowed to open one Cash ISA account per tax year, which means having to choose between the flexibility of an easy access deal and a better rate by locking into a fixed-rate deal.

If you don't mind waiting for a little while before withdrawing your cash, you can opt for a 120 Day notice account from Al Rayan Bank which has an expected profit rate of 1.21%. There's a minimum deposit of £250 to open the account.

You could also lock your money up for a year with Al Rayan Bank and you'll get a rate of 1.35%. You'll need a substantial £1,000 to open an account.

The best Cash ISA over two years is from Al Rayan as well, offering a rate of 1.70% on balances from £1,000.

Bank of Cyprus UK wins out over three years, offering 1.42%.

Virgin Money has stormed to the top of the five-year best buy tables, paying a rate of 2.15%. You'll need to put in at least £1.

Fixed-rate bonds

The Bank of London and the Middle East (BLME) is the best option for savers looking to lock their money away for one year, paying 2.00%, but it has a high minimum deposit of £25,000.

The best two-year rate of 2.22% on deposits starting at £1,000 from Al Rayan Bank. It dominates the three-year tables as well, with a rate of 2.32%. Again, you'll need a £1,000 deposit.

As for the five-year, look to Secure Trust Bank which gives you a rate of 2.51% with a minimum £1,000 deposit.

Bank of London and the Middle East (BLME) rules the roost for seven-year deals, with a 2.55% rate and a mighty minimum deposit of £25,000. It's a heck of a long time to lock your money away, but it beats the rest of the deals when it comes to the rate.

If you want to deposit a more reasonable sum of cash, you can plump for PCF Bank which has a 2.40% rate on its seven-year bond, but you'll need to put in at least £1,000.

Where to earn the most interest on your cash

Here's a table with all the top deals for you to compare at a glance.

The account you go for will probably be determined by the amount you have to save and whether you want instant access to your money.

Account

Type

Interest rate

Minimum deposit

Nationwide FlexDirect

Current account

5% (one year only)

£1 (max: £2,500)

Tesco Bank Current Account

Current account

3%

£1 (max: £3,000)

TSB Classic Plus

Current account

3%

£1 (max: £1,500)

BLME Premier Deposit Account

Seven-year fixed-rate bond

2.55%*

£25,000

Secure Trust Bank Fixed Rate Bond 5 Year Term (Series 33)

Five-year fixed-rate bond

2.51%

£1,000

PCF Bank 7 Year Term Deposit Issue 2

Seven-year fixed-rate bond

2.40%

£1,000

Al Rayan Fixed Term Deposit

Three-year fixed-rate bond

2.32%*

£1,000

Al Rayan Bank Fixed Term Deposit

Two-year fixed-rate bond

2.22%*

£1,000

Virgin Money Fixed Rate Cash E-ISA 268

Five-year fixed-rate Cash ISA

2.15%

£1

BLME Premier Deposit Account

One-year fixed-rate bond

2%*

£25,000

Lloyds Bank Club Lloyds

Current account

2%

£1 (max: £5,000)

Bank of Scotland Classic Account with Vantage

Current account

2%

£1 (max: £5,000)

Al Rayan Bank 24 Month Fixed Term Cash ISA

Two-year fixed-rate Cash ISA

1.70%*

£1,000

Santander 123**

Current Account

1.50%

£1 (max: £20,000)

Bank of Cyprus UK Fixed Rate Cash ISA

Three-year fixed-rate Cash ISA

1.42%

£500

Al Rayan 12 Month Fixed Term Cash ISA

One-year fixed-rate Cash ISA

1.35%*

£1,000

Ulster Bank eSavings

Easy access savings account

1.25%

£1

Al Rayan Bank 120 Day Notice Cash ISA

120 Notice Cash ISA

1.21%*

£1,000

Virgin Money Defined Access E-ISA Issue 15

Easy access Cash ISA

1.06%

£1

*Anticipated profit rate

**Current account charges a £5 monthly fee

What's clear though is that if you want a better return on your money in the longer term, you're better off looking beyond traditional savings accounts right now.

10 PHOTOS
10 things your bank doesn't want you to know
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10 things your bank doesn't want you to know
Once you have opened a current account with a bank or other lender, you will get a steady flow of emails, letters (and maybe phone calls) offering you a savings account, loan, mortgage, ISA etc to go with it. But while it may be tempting to have everything in one place, it's better to do the legwork and shop around for the best financial products. You can compare interest rates on loans and savings accounts in the 'best buy' tables in the newspapers, or look online on comparison sites. Remember you can still easily transfer your money between accounts, even if they are not with the same financial institution. 
Whether you want to apply for a new mortgage or refinance an existing one, your bank will probably be very happy to give you an instant quote in the hope that you will go with them. They may not tell you that you can shop around at other lenders. A mortgage broker can give you an overview of the best interest rates on offer, and might be able to cut you an even better deal him/herself. 

Want to cash in your jars of change that are sitting on your shelves at home? Many banks are not very keen on coins. They often only take it from their own customers. You will have to sort it into different denominations and put the coins in the bank's bags in set amounts (for example, £1 for coppers, £5 for silver, etc). Some banks only take a limited number of bags a day, or won't take any at busy times. Others take a different view: HSBC has free coin deposit machines in many larger branches where you pour your jar of coins into the machine and it counts them and automatically credits your account. Barclays, NatWest and RBS also have machines in large branches in city centres.

Bank employees now have a duty to point out that they only advise on the bank's products and don't offer independent financial advice. What they won't tell you is that even the advice they give you about the bank's own products should be treated cautiously. Bank staff are often undertrained, underpaid and overworked. (You could ask for the employee's qualifications before getting advice.) So do your own research and/or find an independent financial adviser.

Nothing is set in stone. Your bank won't tell you this, but sometimes it will waive a fee, for example an overdraft or an ATM fee, depending on the circumstances. You have nothing to lose by asking, if you can argue persuasively why they should waive the fee. Citizens Advice says your bank should treat you sympathetically if you can show financial hardship.

As stated in the previous slide, some things are negotiable – such as interest rates or waiving fees – if you can make a good case for it. In that instance, talking to an employee in person is better than filling in a form online.

If your account is overdrawn and you get paid, your bank could use this money to pay off your overdraft without your permission. However, you have a right to ask them not to do this so you can pay your rent or mortgage first. This is called first right of appropriation. You have to ask your bank in writing, and you'll need to write to them with new instructions every time money gets paid into your account. Make sure you write 'first right of appropriation' in your letter.

If money is mistakenly credited to your account, your bank or building society can recover the money, assuming they do this within a reasonable time. But you may be allowed to keep the money, for example if you didn't realise the bank had made a mistake and spent the money in good faith. You would have to prove that you spent it in such a way that it would be unfair to ask you to pay it back. You can complain to the Financial Ombudsman if you think your lender is being unfair in asking you to repay the money.


If you do have to pay it back, you could try to reach an agreement with your bank to pay it back in instalments without interest being added.

The Financial Ombudsman Service has more advice on what happens when payments have been credited to the wrong account. If you did something wrong - for example, by entering the wrong account number - rather than the bank, the Financial Ombudsman may still uphold your complaint. They consider whether the financial institution made it clear to the consumer that only the bank sort code and account number are used to process the payment, rather than the name of the payee. They will also ask whether the lender should have realised that the consumer had made mistake, and once the problem came to light, did the firm take reasonable steps to try to get the money back from the recipient.

If too much is deducted from your account, your lender may have to refund the full amount of the payment. For example, if the money is taken through a direct debit or credit card payment for a hotel room or car rental. When deciding whether the debit was reasonable, the bank or building society will take into account your previous spending pattern. But the bank doesn't have to refund the payment if you agreed the amount beforehand or were informed of the payment by your lender at least four weeks before.

If you don't have enough money in your account to cover a direct debit payment, your bank may not make the payment. It doesn't have to tell you that the payment hasn't been made, so the onus is on you to keep checking your account. If, on the other hand, the payment goes through, you may be charged for an unauthorised overdraft.

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