How to Choose A Savings Account
16th May 2016
With interest rates still at an unprecedented low in the UK, savers are struggling to get a significant return from their accounts. As a result, a growing number of people have been turned to more risky investment schemes as a way of growing their nest-egg.
Despite such paltry returns on savings, there are still some good deals to be found from British banks and building societies – if you’re prepared to shop around and focus on your specific financial circumstances.
An Individual Savings Account (ISA) allows you to deposit up to £15,240 of savings every tax year (April to March 2016 to 2017) without being taxed on the interest it earns. Standard current accounts incur a tax on interest, which is usually your base rate of either 20% of 40%.
Considering the fact that the current rate of interest is just 0.5%, the rates of up to 3% being offered by UK ISAs are very attractive.
There are some issues to consider before deciding whether a cash ISA is for you:
- Any cash you withdraw from an ISA loses its tax-free status.
- Choose the right type of ISA for your circumstances. They include easy access, fixed rate and regular saver.
- You can transfer cash from one ISA to another without losing your tax-free allowance.
And before you make your choice, you should ask the ISA provider a few key questions:
- Is there a minimum deposit required?
- Are there any restrictions on withdrawals?
- Does the ISA permit transfers in and out?
- Is the rate of interest paid fixed or variable?
Instant access savings accounts
No one knows what lies around the financial corner of life, so it’s always good to know that you have access to your savings should you need them. By opening an instant access savings account, you will be able to make a withdrawal at any time without incurring financial penalties.
And to make things as easy as possible for you, these accounts usually come with a bank card – so you can make withdrawals at most ATMs.
Before you decide on a particular account, it’s definitely worth shopping around. Instant access accounts will usually come with an introductory offer covering the first six or 12 months.
This ‘bonus’ period will give you a favourable rate of interest, which will expire at the end of the advertised time-frame.
You may also be switched from an attractive fixed rate of interest to a lower, variable rate at the end of your introductory offer period. It is therefore a good idea to make a note of when the offer ends.
A week or two before this date, start shopping around for another deal to make the most of your savings pot.
Regular savings accounts
If you’re starting to save for the first time, you might not be used to the discipline and planning it requires. Opening a regular savings account is a great way to get started, as it requires you to make a significant deposit each month.
Regular savings accounts will often place restrictions on how often you can make withdrawals – which could be ideal if you’re worried that you’ll start dipping into your savings when things get tight.
There may also be a restriction placed on how much you can invest each month.
Like most savings accounts, these particular products come with a wide range of standard and variable interest rates, so remember to check.
An independent financial advisor may be able to help you choose the right account for your circumstances.
Notice savings accounts
Saving can be a tough discipline to stick to in the early days. A lot of people dip into their savings in order to make impulse purchases – only to regret it afterwards. But by opening a notice savings account, you will need to give your provider notice that you wish to make a withdrawal.
Think of this as a cooling-off period, during which you can ask yourself whether or not you really need to purchase the item that is interesting you. Most accounts have 30, 60 or 90-day notice periods, which should be plenty of time to consider your options.
In return for such restrictive withdrawal options, many banks used to offer attractive interest rates – but this is no longer the case. You should be looking for an interest rate of at least 3% from your notice savings account; any less, and it’s probably not worth it.
If you’re absolutely certain that you won’t need access to your savings for at least the next year or so, a fixed-rate bond could be the answer. You will receive a fixed rate of interest over a predefined period of time – after which you can release your funds or tie them to another bond.
The rates of interest that apply to fixed-rate bonds are usually higher than you’ll find with other types of savings account. And the longer you agree to lock your money away in a savings bond, the higher the rate of interest you’ll receive.
Remember: If you withdraw money from your fixed-rate savings account early, you’ll lose out on interest.
Tips for choosing the ideal savings account
With interest rates at historic lows, the need to shop around for the best savings account has never been greater. Choose the wrong option, and your savings simply won’t deliver the returns they’re capable of delivering. By doing a little research from the outset, you can select the account that works best for your particular circumstances. So, before you start your search, do the following:
Decide on a savings goal
How much do you need to save to realise your financial ambitions? When do you need the money? And how much can you comfortably afford to save every month? Use this information to set weekly, monthly and annual savings goals.
Once you know all of your savings targets, you can set about searching for the account that best suits your needs.
The chances are you will have several different goals, so it might make sense to open more than one savings account. For instance, you might want to save for emergency repairs to your home or car – in which case an account that provides instant access makes sense. If you’re saving for retirement, however, a fixed-rate bond with a preferential rate of interest could be the best option.
Carefully research the options available
There are dozens of savings accounts available to you from the UK’s leading banks and building societies – and they all offer different incentives to join. By taking some time now to compare introductory offers, you’ll be able to relax in the knowledge that your money is working hard for you.
But it’s also important to remember that shopping around takes time; which you may not have. If you’re prepared to compare offers every few months, set a reminder on your phone or in your diary.
If you simply don’t have the time to shop around, try to choose a savings account that has a record of offering stable interest rates over the years.
Work out what you can afford every month – and stick to it
There is absolutely nothing to be gained from over-reaching your finances in order to save, as you’ll simply dip into your savings in order to make up the shortfall. Work out what you can easily afford to set aside every month – and stick to it.
If your income varies from one month to the next, steer clear of savings accounts that penalise early withdrawals and require long notice periods. And to make things as manageable as possible, set up a standing order from the outset. Forgetting to pay into your account – even just once or twice – could leave your financial plans in chaos.
Don’t forget to include tax in your calculations
Too many people pay tax on the interest they earn on their savings when they don’t need to. Put simply; if you don’t pay income tax, you should ask for gross interest payments – otherwise tax will be deducted at source.
Of course, you won’t pay any tax on savings in an ISA up to the limit of £15,240. But you should be sure that the interest rate you receive is good enough to take advantage of the tax benefit. There’s no point in setting up a tax-free ISA if tiny rates of interest make standard, taxed accounts more cost-effective.
Never keep more than £75,000 with one savings provider
The funds you put away in authorised UK savings accounts are protected by the Financial Services Compensation Scheme(FSCS). So, if your savings provider goes bust, you’ll get your money back – up to a limit of £75,000 from each institution.
But beware; some banking brands are part of the same institution, and FSCS protection only applies to the first £75,000 with each authorised entity. For instance, Halifax, Bank of Scotland and Lloyds are all part of the same organisation, so you won’t get £75,000 of protection from each of these banks.
The main issues to consider when choosing a savings account
Identifying the best savings account for your circumstances can be a complex, time-consuming task. If you aren’t going to ask for the advice of an independent financial adviser, you’ll need to answer some very important questions in order to identify the best type of account for your financial situation.
Have you used all of your tax-free ISA allowance this year?
If you haven’t used all of your tax-free ISA allowance this year, you should open an ISA and use up the remainder immediately. But remember to look for an interest rate that makes the tax benefit worthwhile. If you have used up your ISA allowance for the year, you’ll need to look for different options.
Will you need to access your savings instantly?
If you think you might need to use your savings in the next few months, you should opt for an instant savings account. However, interest rates can vary significantly between the best and worst accounts on the market, so do your research first. If you know you won’t need to access your savings in the near future, you should be able to get a far higher rate of interest.
How long are you willing to lock up your savings for?
If you have a clear plan of action for your savings, opting for a fixed-rate savings account will make your money work hardest. However, in order for this type of account to deliver a return, you’ll need to commit your capital for a significant period of time. If you don’t know how long you’ll be committing your capital to a savings account for, this definitely isn’t the best option.
Can you commit to monthly payments?
So, if you have used up your tax-free ISA allowance, don’t need access to your savings and are undecided about how long your savings will be tied up, a regular savings account is probably the best option. However, you will need to be sure that you are able to make regular monthly contributions.
If you can’t commit to making monthly payments, but you’re sure that you won’t need access to your capital, the fixed-rate bond and savings account options are probably most suitable.
While choosing the best possible savings account might seem like a chore, a little research now could earn you thousands more in interest over the course of a lifetime.