Spanish bank Santander has released a ‘revolutionary’ new savings bond that pays interest upfront, but experts warn savers to approach the product with caution.
The new product from Santander offers savers the ability to collect a 3.36 percent return on their money before waiting the full 3 years for their savings bond to mature.
This ends up being 2.69 percent in returns after the basic rate tax, which pales in comparison to the best rates available. Clydesdale Bank, for example, offers 4.3 percent on a three year fixed rate bond. However, Santander is hoping to tempt savers with the lure of quick cash in the hopes that impatience will win over the best deal.
The deal is reserved only for those depositing at least £10,000, however, meaning that most families will not be able to participate. Customers must also have a current Santander account before taking out an upfront savings bonds.
The trade-off for the upfront cash also means that savers cannot take their money out of the bond under any circumstances, unlike most bonds, which levy heavy exit penalties but do allow early exit.
Giving savers a boost
Head of savings at Santander, Matt Hall, said that the upfront idea was forged as a way to place Santander ahead as an innovator in the savings market. Hall went on to say that the upfront account gives savers a boost at a time when they know their customers need it.
In fact, one big draw for the product is that customers who invest £12,000 this month would receive £1,000 in December, just in time for Christmas shopping.
While Hall says that the savings can help families take a holiday, shop for Christmas, or reinvest their money “to put it to work immediately,” experts say the maths need scrutinising.
The idea of giving money upfront is uncommon because it is less profitable for banks, experts say. Santander is taking on what is called “opportunity cost” and therefore have reduced interest rates that cannot compete with the top of the savings tables.
Savers are around £200 better off staying clear of the Santander deal and opting for a best-buy savings rate, currently 4.3%, instead. Experts say that while the product is good for bringing innovation to a stagnant industry, it is a “marketing trick” more than a revolutionary way to save.