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Challenger Banks Push Up Cash Savings Rates

Interest rates on cash savings accounts are rising thanks to increased competition from new providers but savers should continue to shop around for best rates

Karen Kwok 13 February, 2017 | 4:38PM

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Great news for savers – savings rates are finally on the rise, with more accounts offering better interest rates now compared to this time last year. Data provided by SavingsChampion.co.uk showed that only 80% of new accounts launched this year offered a better rate than their previous issues, compared to just 25% last year. And it is all down to more competition.

“This competition is being driven primarily by the challenger banks, so those newer and lesser known providers,” said Anna Bowers, director of SavingsChampion.co.uk.

Kevin Mountford, head of banking at MoneySuperMarket agreed, saying that challenger banks are prepared to offer better rates as they have lower operational costs, different business models that allow them to pay more, or a brand-building strategy to offer the best accounts on the market.

“Regardless of the reason, it means that active savers can improve on the rates offered by more traditional banks. Now that the UK Financial Services Compensation Scheme’s limit has increased to £85,000, most savers can rest easy that their money is fully protected up to this amount,” said Mountford.

Should You Consider the Challenger Banks?

According to Bowers, as long as the challenger banks’ accounts are part of the UK Financial Services Compensation Scheme, or the European equivalent, there is no reason not to consider using a provider savers are less familiar with.

With inflation on the rise and interest rates so low, savers’ cash remains in danger of being eroded – so it is more important than ever for savers to shop around for the best rates in order to make their cash work as hard as possible.

MoneySuperMarket’s Mountford urged savers to opt for providers who work hard for their money, saying that only then will the more traditional banks start to fight for our business.

For fixed rate savings accounts, Secure Trust Bank’s five year fixed rate bond Series 29 offers the best rate at 2.06% with a minimum deposit of £1,000, according to data compiled by Moneyfacts.co.uk and SavingsChampion.co.uk. There is no access to your cash within the five-year term and interest is paid on December 31 each year and on maturity. Bear in mind that this account does not benefit from tax-free status.

For savers who are looking to fix their cash ISA rate, Paragon Bank’s five year fixed rate ISA tops the best buy table with a rate of 1.6% with a minimum deposit of £500. Withdrawals are allowed, subject to 365 days loss of interest.

If savers want to lock money up for a less restrictive period of time, Atom Bank’s one year fixed rate saver paying a rate of 1.5%. This account requires a minimum of £50. There is no access within the term and interest is paid annually or monthly.

Best Interest Rates with Easy Access

Charlotte Nelson, finance expert with Moneyfacts said 46% of the easy accesses saving accounts on the market were paying a paltry 0.25% or less. Therefore savers sitting in these poor paying accounts will be better off voting with their feet and switching to a better deal.

Savers on the hunt for a best-buy variable rate cash ISA should look to Paragon Bank’s limited edition easy access ISA account which pays 1.05% with a minimum deposit of £1. Interest can be paid away or compounded.

For best-buy easy access account, RCI Bank UK’s Freedom Savings Account pays 1.1% with a minimum deposit of £100.

Across notice accounts, Secure Trust Bank offers the best rate at 1.19%, with a minimum deposit of £1,000 and a minimum withdrawal subject to 120 days’ notice only. Three capital withdrawals and four interest withdrawals are permitted per calendar year. 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author Karen Kwok

Karen Kwok  is a Reporter for Morningstar.co.uk