18th June 2015
Around 90% of the best fixed rate bonds being offered to savers are now being provided by challenger banks according to Savingschampion.co.uk.
Out of the 25 fixed rate bonds currently sitting in the independent savings advice site’s best buy tables, just three are not from the new breed of challenger banks.
Savingschampion noted that from Friday, Vanquis Bank will be increasing the rates on its 1, 2, 3 and 5 year terms, leaving the market leading 4 year bond unchanged and bringing the 5 year up to market leading status.
In addition these increases mean that they are included in the top 5 best rates across 1 to 5 year terms, which according to the firm, shows that when it comes to deposits challengers want savers.
Anna Bowes, director at Independent Savings Advice site Savingschampion.co.uk said: “Challenger Banks have dominated the best buy tables and changed the savings landscape in recent years and that trend looks set to continue. With 90% of the top fixed rates offered by Challenger Banks, savers would be wise to look to this new breed of provider.”
The majority of banks and building societies in the UK are protected by the UK Financial Services Compensation Scheme meaning there is little difference between a Challenger Bank and a High Street Bank, other than a better rate of interest. Better still, as many of these bonds pay interest after the proposed introduction of the new Personal Savings Allowance (PSA) coming in to effect in April 2016, most savers should receive interest tax free.
Bowes added: “For savers relying on the high street, the difference is stark and getting it wrong can cost you dearly. Lloyds Bank offers a paltry 0.80% gross/AER fixed for 1 year or lock in for 3 years and you’ll get a rate of just 1.20%, 50% less than the very best from a Challenger Bank.
“With inflation at just 0.1%, surprisingly saving in the current climate is looking more attractive. Even with rates at record low levels, savers returns are not being eroded by inflation by as much as they have been, meaning that savers can earn almost 3% gross in real terms, before tax and after the current rate of inflation; a significant real return in the current climate.”
Bowes asserted that unlike many supposed alternatives to savings products that appear to offer eye catching interest rates, traditional savings can offer a guaranteed return, “so what you see is what you get, along with protecting up £85,000 per person, per banking licence. Something that these alternatives can’t offer”.
With the introduction of the new PSA, savers who opt for a fixed rate bond that pays interest after April 2016, including the Vanquis range of fixed rate bonds, that interest may be tax free. According to HMRC, savers opening an account now, which does not pay interest until after 6 April 2016, will be able to benefit from the new allowance on any interest accrued from outset and of course the interest will be paid gross so there will be no need to make any reclaim of tax.
For a basic rate taxpayer, the effect of using the PSA is to increase the interest covered by the PSA by 25%. For a higher rate taxpayer, albeit on a lower level of PSA, the effect is an uplift of more than 60%.