Why should you have a Savings Account?
A cursory glance at the daily headlines should be enough to convince most of us that we are not doing enough to save money. With spiralling national and personal debts, dwindling pensions, and worries about reduced earnings, there are many savings accounts that can allow people to have high rates of interest.
Savings should allow for three to six months living costs in case of unforeseen difficulties (such as redundancy), and one efficient way of doing this is to open a savings account. It’s tempting to select the first available option, but with the interest rates set by the Bank of England at a record low, it is important to compare and contrast different options before committing to an account that might not give you the best possible rate of return on your savings.
Fortunately there are many options for savers. With a wide variety of savings plans to compare and choose from, it’s easy to become confused about what works best. Different accounts are designed to meet different needs, and before selecting a savings account you should ask yourself a few questions.
How to choose a Savings Account
How much am I willing to save?
Savings will only begin to work for you if you can commit to save a minimum level. If the rate of interest looks great, the fine print may tell you that you have to make a minimum commitment that might be too steep, or you may be denied access to your savings for a long time.
How is inflation going to affect my savings?
We have all seen how inflation has affected living costs – inflation also affects our savings. If the rate of interest on your money is less than the rate of inflation, the value of your savings is only going to go one way – and that’s down.
How will I be taxed on my savings?
Regrettably, tax is a fact of life and savings accounts are also subject to taxation. The only exception are Cash ISAs, which allow you to save at a more favourable rate as any interest earned remains yours and is not taxed.
What if I need to get to my money quickly?
If you choose a fixed rate bond your money will be effectively out of reach for a long time. The best option remains an instant access savings account, but this will not offer the long-term return on interest that bonds can offer.
When can I expect to see interest paid on my savings?
This can happen annually, quarterly or monthly depending on the type of account. Annual interest will normally be delivered on longer-term savings plans but monthly interest is more usual for instant access savings accounts.
Comparing Different Savings Accounts
Savings accounts should be compared carefully before taking the plunge, as savings account rates differ according to contractual obligations. It is important to check the minimum balance requirements and also any limits on transfers into the account (some may be limited to one or two transfers a month). It is also possible to set up automatic transfers to an account so that your minimum commitment can be met automatically.
1. Instant Access Accounts
Instant access accounts are common, but consumers should shop around for the best rate as some are more competitive than others. These accounts are useful for being able to access funds in a hurry, but with the return on interest low on instant access accounts, there is an incentive to keep saving and contributing to a more profitable account.
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2. Notice Accounts
Notice accounts provide a better rate if interest than instant access accounts, but require more notice to withdraw cash – from 1 to 6 months. If you are looking to lock money away for special short term project than a notice account is a good option.
3. Internet Accounts
As the costs associated with running internet banks are far lower than those running high street banks, the interest rates they offer can be very favourable. For those who are internet-savvy, access to funds is instantaneous.
4. Regular Savings Accounts
Regular savings accounts require a commitment to deposit a set amount of money each month. No withdrawal is possible until the end of the year, once the interest has accrued.
5. Cash ISAs
Cash ISAs are a way to secure a better interest return by paying no tax on the interest that your savings receive. You can pay a maximum of £15,240 a year into a cash ISA (2015/16 allowance), but you won’t be permitted to pay any more until the beginning of the next tax year which starts on the 6th April. This means that ISAs have a higher rate of interest than instant access and notice accounts, and are ideal for long term savings. It is also possible to access your money quickly.
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6. Fixed-rate Bonds
Fixed-rate bonds can offer interest of more than 4%, but the set period of time to lock money in can range from between one and five years. These accounts do not permit access to your funds until the agreement lapses. Interest is paid annually on these accounts, or more typically in one sum when the investment matures. Use our services to compare a range of fixed rate bonds that includes:
What to be aware of when choosing a Savings Account
You should consider the effect of tax on your savings. Her Majesty’s Revenue & Customs will claim 20% tax from your savings, unless you have an ISA, which will allow an annual maximum deposit of £15,240 within a single tax year. It is also possible to set up a Junior ISA for young people, which can accrue tax-free interest for young savers until they turn 18.
When choosing savings accounts, introductory bonuses can be attractive. Some accounts advertise their headline interest rate of e.g. 3% AER, however this is only payable if you stick to the terms of the account and after the bonus period the rate will probably drop. This favourable introductory rate helps boost the “best buy” rating for the account, but the drop in interest rate after the first year means that savers should be prepared to shop around.
Some accounts place limits on the amount that individual customers can save, or how frequently they can access their funds. This is for good reason – the Financial Services Compensation Scheme (FSCS) guarantees the first £75,000 of savings in case of bank insolvency. If you are fortunate enough to have more than this, it would be advisable to split your savings among several other institutions.
Top 10 Tips for Savings Accounts
1. Check your bonus rates on savings accounts– after the bonus interest is paid e.g. after 12 months the rate will probably drop leaving your savings earning less. Be prepared to switch to a better-performing account as soon as the bonus rate expires.
2. If you can tie your money up fixed rate bonds generally provide better interest rates. From time to time some providers offer inflation linked savings bonds which are designed to protect your cash in real terms.
3. Make the most of your ISA allowance – if it’s a Cash ISA then filling it to the maximum annual limit will allow you to build interest without facing tax. The 2015/16 Cash ISA limit is £15,240. Any unused allowance will not carry over to the following year so it is in the saver’s interest to fill this before the end of the tax year.
4. If possible, have your salary paid into a high-interest instant access savings account. This will allow your money to begin earning interest the moment it lands in your account.
5. Having goals can be useful for motivation. Saving for a holiday or other project can be a great way of maintaining focus.
6. Learn to use internet banking – it is a great way of keeping track of all of your accounts. It is also available outside of office hours and though mobile phones.
7. If you are not a tax payer many providers can pay your interest gross. You will need to ask the savings provider for the relevant tax form R85 from HMRC.
8. Keep an eye on your Cash ISA interes rate. Providers often pay less interest on cash ISAs because they know that the tax advantages often mean people are reluctant to transfer. You can transfer a cash ISA without penalty to another provider if you are not happy with the interest rate.
9. If a fixed rate bond ties up money for too long consider a notice account. With notice accounts notice periods range from 30 days to 180 days. These types of account however are often branch or postal access only.
10. With savings accounts deals rates are changing constantly so shop around to ensure you are maximising the interest on your savings.