Interest rates for traditional savings accounts haven’t been very interesting lately.
Many savers are bored, miserable and getting gloomy returns. There are a few exceptions to the rule, of course, but most accounts struggle to beat the current rate of inflation. It’s therefore no surprise that many savers are considering an alternative.
One little known and used option are accounts offered by credit unions, for example, the new Interest Bearing Deposit Account from RetailCURE. It offers a fixed interest rate of 3% over a period of 12 months with a maximum deposit limit of £15,000. In contrast, the highest fixed rate savings account at the time of writing this offered just 1.61%.
So, what’s the catch? Well, RetailCURE is a credit union, which raises a few questions, including:
- What is a credit union and how exactly does it work?
- How do I get a return?
- What are the risks?
- Who is it right for?
First things first – what exactly is a credit union?
A credit union is an organisation run by its members, where savings are pooled together. These savings are then used to lend money to members, who pay it back with interest. This interest generates an income for the people depositing money, being paid either:
- In the form of dividends each year
- As a fixed interest rate
To become a member of a credit union, you usually have to hold something in common, such as:
- Working for the same company
- Living or working in the same area
- Belonging to the same church or trade union
- Working in the same sector
This link is called a ‘common bond’, and different unions may hold multiple bonds among its members. For example, the RetailCURE account, as the name suggests, is only available to those working in the retail sector.
Credit unions will have different policies in place as to how accessible your savings are. Using RetailCURE as an example again, its Interest Bearing Deposit Account is fixed at 3% for 12 months, 2% for six months and 1% for easy access. Your money can technically be accessed at any time for the six and 12 month accounts, but any interest accrued is forfeited if your savings are withdrawn before the term is over.
So how exactly do I get a return?
Traditionally, credit unions paid out an annual dividend at the end of each tax year. This dividend depended entirely on how profitable the union was, so on good years a large dividend could be expected, and for bad years a dividend may not be paid at all.
This changed in 2012, when a law was passed allowing credit unions to pay interest. At the time of writing, most still use the dividend system, but using interest rates becoming increasingly more common.
The income earned from a credit union is taxable, and is taken out of your Personal Savings Allowance (PSA). The PSA is the amount of income you can receive from savings before paying tax and is currently:
- £1,000 for basic-rate taxpayers
- £500 for higher-rate taxpayers
- £0 for additional-rate taxpayers
How risky is it?
Generally speaking, credit unions are members of the Financial Services Compensation Scheme (FSCS). That means that deposits of up to £85,000 per person, per institution are safe should it fail. However, before saving any money with a credit union, make sure to check that your savings are indeed covered by the FSCS. Providing they are, you should have the same protection as saving with a high street bank.
Who should consider a credit union?
Whether a credit union is right for you depends entirely on your personal circumstances, but as a general rule:
- Savers who don’t want to expose their capital to significant risk
- Savers who are dissatisfied with the accounts currently available from high street banks and building societies
The fact that credit unions are generally protected by the FSCS means that savers who are happy to put their money away for at least 12 months may able to stay slightly ahead of inflation, which as of June was 2.9%.
Credit unions aren’t available to everybody, but if you are eligible, and you would rather save than invest, they offer a viable and secure place to put your money away.
Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.