The best ways to give when compassion costs too much

When times are tough economically, as they are now, it can be a big ask to think of saving the planet or helping others less fortunate. Charities, for instance, are reporting lower donations as people rein in their outgoings and prepare for a likely recession.

But there is a way in which you can benefit good causes without straining your own finances – by opening a charity or ethical savings account.

These accounts fall into two categories. The first type, operated by standard high-street building societies, diverts some of the interest that would normally go to the saver and pays it to a charity. There are dozens of these "affinity" accounts and they benefit high-profile organisations such as the National Trust, Save the Children and Shelter, as well as small local causes such as hospices.

The vast majority of affinity account providers are building societies, which are often local and may have a long- standing relationship with the charities that their products benefit.

"Most of these accounts are branch- based and come with a passbook. They are very simple – it's just that part of the interest earned is siphoned off to a good cause," says Michelle Slade from financial information service Moneyfacts.

But the amount that the causes gain can vary between the accounts, as can the interest paid to the customer.

"The most lucrative pay 1 per cent interest to the charity, so a £10,000 deposit will earn it a £100 a year. But there are some that pay only 0.5 or 0.25 per cent to the good cause, though there may be the option for savers to direct more from their own return," adds Ms Slade.

Meanwhile, the interest received by the customer is a long way off the "best buy" savings rates. Moneyfacts calculates that the accounts pay just 3.18 per cent on average.

"People who open these affinity accounts have to accept that they are in effect losing money," says Kevin Mountford from price-comparison website Moneysupermarket.com. "Inflation is running at around 5 per cent, so if you are earning 3 per cent in one of these accounts then your pot of money is in effect shrinking over time," he adds. "You should always test your savings against inflation."

The second type of account is as much a lifestyle statement as a way of helping a good cause. These deals, which are often branded "ethical", involve saving with an institution that in turn lends to the charitable sector as well as companies involved in environmental and socially beneficial projects, such as renewable energy.

But they also offer rates that, while not desperately poor, are well below best buy and fail Mr Mountford's inflation test. For example, the online cash individual savings account from Triodos bank pays 3.85 per cent and the Charity bank's 30-day notice ISA pays 4.5 per cent. Even the Co-op bank – which makes a big play of its long- standing ethical stance and its rejection of nearly £900m of potential loan business because the companies applying have not met its ethical trading standards – still only pays 4.25 per cent to its cash ISA customers.

But Charles Middleton, managing director of Triodos bank, one of the big names in the ethical sector with €3bn (£2.3bn) under management, says the type of people who save with these providers are concerned with more than the headline rate of interest. In short, they have little faith in traditional banks or best buys. "They are often a case of smoke and mirrors," Mr Middleton explains. "We look to deliver a fair rate, but crucially our business is transparent: savers can see exactly what projects and organisations are benefiting from their cash."

Mark Howland from Charity bank, the only UK bank that is itself a registered charity, agrees that the main selling point of its accounts is transparency rather than rates. "We have a very simple and traditional business model: savers deposit their cash with us and then we loan that out to charities and other not-for-profit organisations, and they in turn pay interest. The savers can see the 700 projects that their money has gone to, and have the satisfaction that over three million people have benefited."

But the question of the moment has to be asked: how safe is depositors' cash? Well for a start, affinity account providers and ethical and charity savings institutions are covered by the Financial Services Compensation Scheme (FSCS), so the first £50,000 of a saver's cash is guaranteed by the Government.

"Our loan default rates are less than 1 per cent, which a standard high-street bank would be delighted with," adds Mr Howland. "We are regulated by the Financial Services Authority and jump through the same hoops as everyone else. And unlike the high-street banks, we haven't been chasing profits and getting involved in exotic investments or buying up debts. So we are in a good position."

Likewise, Mr Middleton thinks the charitable and ethical banking sector has shown the way to the the big institutions: "After what has happened, they are going to have to return to a more simple business model, like ours: you attract savers' money and then you lend it out. Their balance sheets are going to have to become more transparent."

But not all is rosy in the ethical garden. Several credit unions, which provide savings and loans in disadvantaged parts of the UK, have folded in the past two years, leaving depositors to rely on the FSCS to get their money back. Banks such as Triodos and Charity are far bigger enterprises and well regulated, but just because an institution is worthy doesn't mean it can't go bust.

Putting aside the safety issue, some experts suggest a different approach to savings with a conscience. Mr Mountford explains: "If you want to help a charity, why not go for the highest-paying savings account you can find and then use some of the extra interest you earn – over what would be available through one of these ethical or charity accounts – as a standard donation."

What's more, charities can enjoy tax relief on donations made through payroll using the "give as you earn" initiative.

However, there are downsides to Mr Mountford's idea. "There is a lot of hassle involved in finding the best- paying account and then arranging for a proportion of the interest to go to a charity," says Ms Slade. "Many people would prefer to have everything in one place through simply choosing an affinity account or saving with one of the ethical providers."

A saver's ethos

'I'm dropping interest but it's a moral choice'

Working as a fair trade co-ordinator in the Bristol area, Jenny Foster, 41, is already sold on the idea of ethical and charity savings. "I believe in certain things and want the choices I make to reflect these principles. It's important to me to know where my money is going and that it is doing good in the wider community."

Jenny has a cash ISA with Triodos that currently pays 3.85 per cent – two and a half percentage points below the best available on the high street. "I accept I'm paying for my choice through loss of interest, but it's a moral decision. What does a couple of per cent matter if you are doing the right thing."

She adds: "Somehow I feel more secure with a smaller local bank than I do with my money in one of the big high-street names. Look at the mess these banks are in.

"Big doesn't necessarily mean safe. This is the message that has come out of the credit crunch."