Should we value safety at all costs?

The level of protection offered by the Financial Services Compensation Scheme (FSCS) increases today from £75,000 to £85,000.

The FSCS covers money held in UK bank accounts and building societies, and does not apply to investments such as stocks and shares, mutual funds, peer-to-peer loans and some forms of bonds, for example.

Just how valuable is that extra protection? Well, according to RateSetter research commissioned last week, only 4% of people have more than £75,000 in any one bank account, so the vast majority of savers won’t benefit from the change. Yet while the FSCS will provide extra protection that a few people might appreciate, it is unable to address a more pressing problem for millions of savers: low returns.

The average instant access savings account pays just 0.15% in interest. Five years ago that figure was 1.52%, and many readers will remember a time when 5% was the norm. To make matters worse, inflation currently stands at 1.6%, meaning that on average, savers are losing money in real terms.

Protecting people’s savings is a perfectly sensible objective, but what is rarely explained is that this protection doesn’t come for free: the cost of all the various protection measures – including the FSCS – is reflected in the low interest rates paid on savings.

So, what if people were given a choice between protection and returns? We took a closer look at this and asked people whether they would prefer an extra one percentage point on their savings interest rate or an additional £10,000 in FSCS protection. The response was very clear: seven people in ten told us that they’d prefer the former.

Our view has always been that in exchange for accepting some proportionate risk, it is possible to achieve a better return. This is the proposition that underpins our offer: without making a promise of safety, value can be delivered directly to investors - since launch, the average rate of interest earned by RateSetter investors is 4.7%. Of course, this doesn’t stop us actively helping investors to manage risk, and while it is not a guarantee for the future, our Provision Fund has a perfect track record to date.

So to sum up: a savings account is the perfect place for rainy day money – money you can’t afford to lose – where the priority is safety, not generating a return. However, if you want to see your money grow and you are prepared to take on some risk in order to achieve this, it pays to look elsewhere.