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Are the new banks any good for savings accounts?

shoppingHere’s some good news. Inflation fell last month to 1.8%, which is its lowest level for two years. While that’s obviously good news when you go shopping you may not realise that it also has an effect on your savings. If inflation is at 1.8%, then you need to earn at least that in interest otherwise you’re losing money.

This is how it works: assume you’ve got £1,000 in an account paying 1%. At the end of the year, you have £1,010 (1% of £1,000 being £10). But if inflation over that time is 1.8%, the spending power of your £1,000 has declined to £982 (1.8% of £10,000 being £18). So you’ve actually only really got £992 at the end of a year (£982 plus the £10 interest).

According to Hargreaves Lansdown there are now more than 170 savings accounts and cash isas which pay more than 1.8%. And these aren’t all fixed rates, although most are. Most of the top deals are from banks you might not have heard of. These new names have stormed into the UK savings market in the last few years, taking away savings business from traditional banks and building societies. Most are internet or App only. Some offer ‘expected rates’ because they are run according to Islamic principles which mean they don’t pay interest but a share of the profits.

However, the end result is the same as with a non-Islamic bank. And your money is still covered by the usual protection (up to £85,000). Data compilers Moneyfacts says among the current top deals is a one year fixed rate from Raisin at 2.05% on £1,000. Raisin is a savings marketplace: the bank offering the rate is QIB (UK) – Qatar Islamic Bank. Raisin has 2.35% for a two year bond with a minimum deposit of £1,000 with the bond offered by Gatehouse, another bank following Sharia principles. If you want a longer term fixed rate – although I’m not sure I would at the moment – then there’s a three year bond from Aldermore paying 2.4% on £1,000. Aldermore isn’t an Islamic bank so offer conventionally-calculated returns.

To beat inflation with a variable not fixed rate you will have to accept a longish notice period for withdrawals. You can get 1.9% - just beating inflation – from Charter Savings Bank as long as you accept 95 days’ notice on withdrawals. I think I’d be inclined to go for a one or possibly two year fixed rate deal if I had money I didn’t want to risk investing but didn’t need as rainy day money. Sadly for an easy access account – the kind you need for day to day emergencies – you’re still not going to beat inflation. You can get 1.5% on the Marcus account which includes a 0.15% bonus over a year. That’s probably as good a deal as any. You can search for deals on comparison sites including uSwitch*, comparethemarket* and Moneysupermarket*.

And see our guides to savings here.

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Wednesday, 20 March 2019