Non Traditional Saving Methods
With interest rates at historical lows many people are turning away from the traditional high street bank for their savings products. Company bonds, smaller banks and peer-to-peer lending are all becoming favoured alternatives among those looking for inflation beating interest rates. But is your money safe there? We investigate.
Perhaps the safest alternative is a savings account with a smaller bank, provided your savings per banking group is at or lower than the government's threshold for compensation if something goes wrong. Perhaps the safest bank, in terms of being the least likely to require a bailout, is HSBC. However their interest rates are among the lowest of any bank account, offering just 1.3% before tax. Even Halifax, the recipient of a large bailout during the financial crisis, is only offering 1.6%. Smaller banks you've never heard of are offering better rates though - but make sure they are covered by the FSCS compensation scheme to avoid an IceSave style disaster. The compensation maximum is currently set at £85,000 for a personal account and £170,000 for a joint account, but only applies when you place your deposit with a bank registered in the UK - which does include some international banks.
Another alternative is bonds issued by banks. These aren't savings products and are not accessible like deposits. You can currently get interest of up to 1.95% on year bonds with some smaller or international banks. However there are dangers - Co-Op Bank bondholders are likely to lose out in October when the bank announces how it will cover their £1.5 billion balance sheet hole.
Corporate bonds are also becoming popular. These used to just be sold to big investors on the bond markets, but in recent years smaller bonds of around £1000 have become increasingly common. You are effectively lending a corporation the money for a set period of time in return for fixed interest. While the bond can't be cashed in early with the company, it is a tradeable commodity so you can always sell it to another investor. If confidence in the company has increased you'll make a profit. However if the company is in trouble you could lose a significant proportion of your investment. It's risker than savings, but the potential for profits is also larger. Bonds of 5% plus interest are increasingly common.
Companies love these products because they allows them to access finance when banks are reluctant to lend, and often give them better interest rates than bank loans. Savers love them because their interest rates are significantly higher. As long as the company is able to repay the bond at the end it's a win-win for everyone.
The risk involved will put many off, and it's not a good idea to put your entire savings into one company. However you can mitigate some of the risk by using an investment fund. Not only is the investment pooled between many companies and therefore less likely to default, but the FSCS also have a protection policy on these products. The first £50,000 of any investment you make in a fund management company will be protected if the fund management company folds. It does need to be pointed out though that this doesn't protect the performance of individual companies the fund invests into, but rather just the fund management firm.
Increasingly popular alternatives have a bit of the glam of Silicon Valley about them. Peer to peer lending firms operating online promise much higher interest rates but have risks attached. Each site has a slightly different model, but they typically spread out the investment to help protect the lenders from individual defaults of borrowers.
Of course there's always the property market - buy to let is as strong as ever, although runs the risk of another property market crash. In London prices are already higher than their pre-crash heights and the rest of the country is catching up too. It's likely property prices will go up next year with the government's new help to buy scheme, but in the longer term it's anyone's guess.