Savers with large sums of money to keep in cash face a tough decision – either to split it into FSCS-sized chunks or potentially to leave some of their money unprotected.
Many will not have the time or patience to split their money, so will probably leave it residing with their trusted high street provider and therefore earn a pittance.
But there may be another way that could mean the difference in thousands of pounds of extra interest, without the need to open loads of accounts.
NS&I can be a really useful place for large cash deposits, as the full amount deposited with them is protected by HM Treasury. However, what happens if NS&I doesn’t offer an account that suits these savers’ circumstances – or the rate isn’t competitive?
An alternative approach could be for these savers to search for a provider that they feel has enough financial strength to leave a larger deposit with.
For this, some may turn to the ratings agencies, such as Moody’s and Fitch, to get a better indication of the Banks’ financial health, although some providers choose not to get a credit rating for a variety of reasons.
Of the main 149 banks and building societies in the UK savings market, just 59 have a Moody’s Rating, 53 have a Fitch rating and 52 have both. Standard & Poor’s (S&P) is also a well-known ratings agency but fewer savings provider request a rating from them – only 39.
But it is the quality or “grade” of that rating which is key
The ratings are classified slightly differently with each agency, but all generally consider that those with an A rating or above are judged to be of a higher quality. There are similarities as well as differences, but here are the basics;
- The highest rating is AAA with all of them and the lowest is D (S&P and Fitch) and C (Moody's).
- BBB- at S&P and Fitch and Baa3 at Moody’s are still considered ‘investment grade’, so are the lowest ratings before you get into non-investment grade bonds, often called junk bonds.
- Moody’s use numbers as well as letters. The number ‘1’ after a letter symbolises a stronger company than a number 2 or 3.
- Fitch and S&P, on the other hand, use plus and minus signs after the letters.
- A triple rating (AAA, BBB, CCC etc) of the same letter is always better than a double rating (AA, BB, CC etc), regardless of the number or plus/minus symbol that comes after it. For example, BBB- is a better rating than BB+. But an A- is a better rating than a BBB+.
Of the 52 providers who have both a Moody’s and Fitch rating, only 29 have a rating of A or above with Moody’s, just 25 with Fitch and 17 with Standard & Poor’s.
The ratings agencies themselves are keen to point out that these ratings are just their opinions of the relative credit risk of fixed income obligations. What this means is that they address the possibility that a financial obligation will not be honoured as promised. Such ratings reflect both the likelihood of default and any financial loss suffered in the event of default.
They are not an endorsement of a particular bank or building society
They're aimed at the professional investor, but for those who have more than £85,000, ratings could provide a clue about reliability, as they could be considered as one measure of an organisation's financial well-being. However, they cannot be relied upon as a guarantee of whether they will get into financial difficulty in the future or not.
All of the top six high street banks get at least an A rating from Moody’s – but offer really pitiful rates.
Should a saver with a large sum decide that they would prefer to use a provider with a minimum A rating, they could miss out on thousands of pounds if they don’t also consider the rate on offer.
For example, if they were to deposit £500,000 into an easy access savings account with HSBC they could earn just 0.05% or £250 in gross interest over 12 months (the rate is 0.10% for HSBC Advance customers).
But if they chose a more competitive rate with Yorkshire Building Society, which is rated A3 with Moody’s and A- with Fitch, they could earn 1.11% or £5,550.
And NS&I Income Bonds pay 1% AER, so £5,000 per year, although the interest must be paid out monthly – it cannot be compounded.
Fixed Rate Bonds
If they were looking for a fixed rate bond, the difference is even more striking.
Bank of Scotland is offering just 0.40% for a 12-month fixed rate bond, whereas Close Brothers (rated Aa3 by Moody’s and A by Fitch) is offering 1.75% gross. That’s a difference of earning £2,000 or £8,750 gross over the year, on a deposit of £500,000.
For those happy to consider a Sharia account, there is one A rated provider (Al Rayan – rated Aa3 by Moody’s) offering slightly better rates.
For example, over 12 months the expected profit rate is 1.85% gross/1.86% AER, so on £500,000 your return could be £9,300, before tax.
However, it is important to understand that, rather than a fixed rate of interest, the return is an expected profit rate, so is not guaranteed.
For those with smaller balances, Investec is paying 1.90% for one year on balances of up to £250,000 (Moody’s give Investec an A2 rating and Fitch BBB+).
And of course, as stated earlier, NS&I offers its unique 100% guarantee on all funds deposited with them, so although they are not always offering the best rates, savers can rest assured that all their money is protected.
Over five years, there is very little choice of A rated providers, but obviously the extra interest earned is per year, so will add up.
The top six high street banks are not offering five-year bonds, so anyone looking for one of these accounts from an A rated provider has to choose between Nationwide Building Society, Leeds Building Society or Close Brothers.
Close Brothers has the best rate of 2.50% which is only 0.06% less than the market leading rate from Vanquis Bank – which does not have a rating.
Savers can earn more if they are happy to split their funds and open multiple accounts. The six current best one-year fixed rate bonds earn a blended rate of 1.84% - or £9,191 in gross interest – so an extra £441 over the year.
With current rates, an easy access portfolio would earn a blended rate of 1.24% - or £6,204 gross interest – so an extra £654 per annum more than interest from the Yorkshire Building Society account or £1,204 per annum more than NS&I Income Bonds.
So, for those who want the simplest option and if a good rating offers peace of mind, they don’t have to accept a pitiful interest rate.
To find out more or to run through your options with a savings expert, call us on 0800 011 9705.
Find out how safe your savings are using our extensive Financial Services Compensation Scheme (FSCS) licence guide.
Should I be moving some money away from cash and investing? How do I pick a financial adviser?
Savers could be missing out on £billions in interest by not switching