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You often read about ‘savings and investments’, but the difference isn’t always clear. To put it simply: savings refers to the cash you hold in the bank or building society and investments are everything else. There are lots of places to get advice on your investments, but it’s much harder to find advice on savings – this is why we have created the Savings Champion. Savings are the only thing we do!
While it’s difficult for many of us to imagine setting money aside in such a tough economic environment, it’s really important to try and build up the minimum equivalent of a few month’s income so it can be readily available in case of a rainy day. You never know when there might be an emergency or a change in your circumstances – the boiler might break down in the middle of winter or if you’re made redundant you’ll still need to pay the bills while you look for another job. You need to be sure you won’t lose any of that money, so where you keep it really matters.
Just £10 a month can make all the difference. While it might not seem much, it’s a great start and over the long-term it can become really worthwhile; after five years you could be sitting on a nest egg of over £600.
Anyone who’s watched ‘It’s a Wonderful Life’ or who witnessed the panic caused by the 2009 Northern Rock collapse will be familiar with the expression ‘run on the bank.’ Thanks to this and the very real economic problems we’re experiencing, many people are wary of the banks and building societies and think keeping money under the mattress is the safest place. But for many reasons this isn’t the case – it’s just important to be careful.
The main enemy of the saver is inflation, especially when interest rates are low and inflation is relatively high, as is the case at the moment. The money you invest will still increase as the interest on the account is added, but the cash value is falling in real terms. This is because the items that you need to buy in the future will have gone up in price more quickly than the value of your cash
So it’s vital to shop around for the best possible interest rates for your savings. You also need to find the type of savings account that best suits your particular circumstances and be aware of some of the tricks of the trade that could tempt you into an offer that may not be as good as it appears to be. Again, this is where Savings Champion can help you and you’ll find information in this guide and on www.savingschampion.co.uk to help you make an informed choice.
Once you have chosen the best savings account, it’s no good simply forgetting about it; you need to keep an eye on the rate to make sure it remains competitive. That’s where we can help. If you sign up to our Rate Tracker service, we’ll let you know when the rate changes on your account and whether it’s still competitive. And if you sign up to our Email Alerts, we’ll let you know when new accounts come to the market so you can see if something better has become available that you might want to switch to.
The cost of delay
The earlier you start to save the better, for a number of reasons.
First, it will encourage a great savings habit. A useful starting point is to do a budget plan identifying all the details of your expenditure each month so you can work out just how much you can afford to set aside.
This exercise can be very revealing. Not only will it show you how much you are potentially wasting on unnecessary items, but it will also indicate the amount you will be able to save on a regular basis. Once that amount is decided, by setting up a direct debit from your bank account it will just become another bill – but one that will give you money back when you need it.
Starting earlier is also better for your pocket. It's staggering how important the early years of saving are; with the impact of compound interest you can build up a substantial savings pot for the future with an early start.
For long term savers, a delay of just 10 years could halve your savings pot.
For example, if you were to save £200 per month from the age of 25 to 65, assuming an average interest rate of 5% gross you could build up over £300,000 – a significant nest egg.
However, if you started just 10 years later at age 35, you'd end up with around £167,000, almost half. Or, to put it another way, you'd need to save £360 per month instead of £200 in order to match the £300,000.
The prospect of locking all your long-term savings in the stock market or in a pension plan that can’t be accessed until retirement is not ideal for everyone. If you want to have access to some of your money ‘just in case', saving in a cash account can be lucrative with a little bit of shopping around – and as already emphasised, the earlier you can start, the better.
Even though the base rate is at a real low at the moment, providers are still offering some attractive rates.
Of course, it’s difficult currently to find a savings account offering 5% interest on an ongoing basis; so it's vital to shop around for the best rates available. It’s also important to maximise your cash ISA allowance each year, to reduce your tax liability.
How safe is your cash?
At the end of 2010 there was a significant increase in the amount of bank or building society saving that is protected, known as the saver’s compensation limit. This compensates you for your savings in the event of a bank or building society going bust. The Financial Services Compensation Scheme (FSCS) protects a total of £85,000 per person per bank or building society. The previous amount per person protected was £75,000.
However, as ever, there are some things to watch out for.
Different providers may be owned by one parent company and, as a result, irrespective of the amount of your savings across the providers, only £85,000 in total will be protected. To check who is linked to who and how much of your money is actually protected, take a look at our Financial Licence Information Guide. As an example, any money already invested with Abbey, Alliance & Leicester and Bradford & Bingley now all comes under the umbrella of Santander. As far as the FSCS is concerned it is treated as being with one provider. Santander has rebranded all of its accounts but with some providers it is less clear: Bank of Scotland plc has one licence that also covers Halifax, Intelligent Finance (IF) and Birmingham Midshires (BM Savings) amongst others. In addition, many AA Financial Services and Saga savings accounts are actually provided by Birmingham Midshires. In all these cases the £85,000 saver’s limit relates to the combined amount held in any of these accounts.
It’s also important to be aware that some banks are based outside the UK, but within the European Economic Area (EEA), such as Triodos Bank. This means that they are covered by their own country’s compensation scheme rather than the FSCS and you will need to check the amount protected.
So to sum up, if you have more than £85,000 to put into savings, spread it around in order to make sure that it is all protected.
to see which providers are covered by the FSCS and which are based in the EEA and are therefore covered by their own country’s national compensation scheme.
Which type of Savings Account is right for me?
Of course choosing the right type of account isn’t always straight forward. There are a number of different types, which may or may not be appropriate, depending on whether you may need immediate access, or would be able to give notice in order to access your cash. Or perhaps you would prefer to know exactly how much interest you will earn over a period of time? Below is a brief guide to the different types of account available. Of course if you are still unsure of what is best for you, you can email us or call us.
Instant Access or Easy Access Accounts
These are usually simple savings accounts that allow you to withdraw cash without notice. As a result, sometimes the interest rates may be lower than on other types of account, although as this is a very competitive area, there are some great deals to be found.
Since the introduction of telephone and internet accounts, Instant Access Accounts may now be referred to as Easy Access. They allow you to transfer money to another account or to request a cheque through the post, but there can be a slight delay.
And it’s not always as straightforward as it sounds –on some accounts, although you don’t need to give notice, there may still be a penalty for making more than an occasional withdrawal, so it’s important to check exactly what you are getting into.
Just as it sounds, these savings accounts require you to give notice in order to access your money without a penalty. The normal notice period can range from seven to 120 days. Notice Accounts may pay better rates of interest for anyone who can plan ahead, but not always.
Sometimes the account will allow instant access with a penalty, typically a reduction of interest equivalent to the notice period. This can be taken from the capital if insufficient interest has built up prior to access, so it’s important to plan carefully.
For some people, not being able to access the money immediately is important to help them to resist dipping into the account.
Regular Savings Accounts
If you don’t have a lump sum to invest, you can always save an amount each month. You can do this with a normal Easy Access Account or Notice Account, or you can take advantage of a Regular Savings Account, which will often pay a better rate of interest.
Of course, there are likely to be some conditions in the form of restricted access and the requirement to pay a regular amount every month for a fixed period, normally 12 months. Accounts will have different terms and conditions: for example, sometimes you only need to make 11 out of 12 payments for the year; with some accounts you can vary the amount you save while with others the amount must be the same, and occasionally some withdrawals may be allowed.
Regular Savings Accounts normally offer a fixed rate of interest for the term, but there are also many variable rate accounts around, so keep your eyes peeled and check out our Expert Comments on the Best Buy table.
Fixed Term Accounts
There are many different terms used to describe this type of account, most commonly Fixed Rate Bonds, Fixed Rate Deposits or Fixed Rate Savings.
These are accounts that pay a fixed interest rate for a fixed term, usually ranging from six months to five years. Normally no access to your money is allowed until the end of the term although increasingly providers are offering some access during the term.
While a limited number of penalty-free withdrawals maybe offered, it’s usual for there to be a hefty penalty equivalent to a loss of interest earned over a defined period. For example, a one year fixed rate savings account offering earlier access may impose a penalty equivalent to 180 days’ loss of interest on the amount being withdrawn. And this penalty can be taken out of the capital originally invested if sufficient interest has not been earned. This is why it’s important to make sure that you are able to lock your money away for the full term.
An Individual Savings Account (ISA) is simply a tax free ‘wrapper’ offering you a tax break, so that you are sheltered from some or all of the tax on the investment. Every year, all UK residents aged from 16 have an annual ISA allowance. For this tax year (2015/16), the total ISA allowance is £15,240. You can choose to put the whole allowance in a cash ISA, invest in a stocks and shares ISA or have any combination of the two, up to the maximum allowance. The minimum age for a stocks and shares ISA is 18.
No tax is payable on the interest earned in a Cash ISA, so if you’ve not used up your ISA allowance, you are paying more tax than you need to. Even non taxpayers should consider a Cash ISA as, over time, the amount they build up in this tax free wrapper could become considerable, yet, under current legislation, they’ll never need to pay tax on it, even if their circumstances change.
Like savings accounts in general, Cash ISAs come in many shapes and sizes. They can offer easy access to your money, although any capital withdrawn from an ISA cannot be replaced once the full allowance has been used. Cash ISAs can also be Notice Accounts or Fixed Term Accounts. The most recent type of Cash ISA launched was the Help to Buy ISA, which is designed to help First time buyers to get on the property ladder.
It’s great to get children interested in saving as early as possible and there are a range of different types of Children’s Accounts available to suit most needs. There are Children’s Easy Access Accounts, Notice Accounts, Regular Savings Accounts and Fixed Rate Accounts. From the age of 16, children can invest into a Cash ISA and the Junior ISA has just been launched which will give many younger children a tax free account to save into.
The terms and conditions on children’s accounts vary widely, such as the age range allowed and access to the money. In addition, many accounts will offer gifts such as piggy banks and soft toys, but it’s important not to be drawn to an account simply because of the freebies. How the account works and the interest rate payable is far more important in the long run – and if it offers a great gift too, that’s a bonus.
One thing to be aware of regarding children’s accounts is that the interest earned on any money given to the children by their parents, may actually be taxed as though that money is still in the parents name. However if the gross interest earned is less than £100 for each parent’s gift, it will be treated as the child’s under the de minimis rules. This will mean that provided the interest earned does not make the child a tax payer, they will be able to offset this against their personal tax allowance, so it will often be free of tax.
Gifts from any other family members or friends will not be viewed in the same way. Instead, any interest earned will be treated as belonging to the child themselves and therefore can be earned tax free if they are non taxpayers. A form R85 can be completed by a parent or guardian to allow the interest to be credited to the account without any tax being deducted. Your savings provider can provide you with one of these forms, or you can download one from the HMRC website.
National Savings & Investments (NS&I)
NS&I is a savings institution which is backed by the Government and is therefore considered to be the most secure provider of the lot. As a result, the interest rates offered are rarely the best on the market. Many of the accounts offered are similar to those available from other savings providers but there are some differences:
The Income Bonds pay interest gross, rather than after basic rate tax has been deducted. This makes it simpler for non taxpayers but a bit of a headache for basic rate tax payers who normally wouldn’t need to fill in a tax return. If they hold an NS&I Income Bond, they are obliged to tell the taxman about it.
Premium Bonds are an old favourite but more of a lottery than a savings account, although unlike the lottery, you won’t lose your original capital and you might just win a big prize.
Index Linked Savings Certificates, which are not always available are very useful, especially for tax payers, as they will pay a rate equivalent to the Retail Prices Index, plus a little extra, over either three or five years. As the returns from these are tax free, you can be sure that your money will always be protected from inflation.
Fixed Interest Savings Certificates are also available sometimes, but not always. They too are tax-free and as their title suggests, they will pay a fixed interest over a fixed term of either two or five years.
Here at www.savingschampion.co.uk our mission is to make each type of account clear to our customers and to help you decide which one is right for you.
Tricks of the Trade
Banks and building societies have become increasingly sophisticated over the years and have introduced a range of ploys that can elevate their accounts to the top of the Best Buy tables. For the canny investor, this can be a great way of squeezing out as much interest as possible, but for others it can be an expensive trap. Below are some of the things to look out for.
Many of the best accounts available will include what is known as a bonus and it’s important to understand just what this means. A more straight forward description would be that the account pays an enhanced rate of interest for a specific period of time, such as six or 12 months. Increasingly there will be a specific date at which this enhanced rate will end but either way it’s essential to make a note of when the bonus is due to end, so that you can find another competitive account to switch to. If you use our Rate Tracker service, we can remind you nearer the time that the bonus is coming to an end, and let you know the best rates available at that time.
A bonus account is great if you are the type of saver who will be ready to switch to the next best account at the end of the bonus term, but for those who are more likely to just leave the money languishing, bonus accounts may not be appropriate.
Another ploy is to offer an Easy Access Account that will actually penalise you if you try to access your money too often. For example, the provider may offer a very competitive interest rate but the account allows only a small number of withdrawals over 12 months. If more withdrawals than stipulated are made, the rate may drop dramatically, in some cases the account will be closed or no further access to the money granted.
These accounts are, therefore, only really appropriate for those who don’t need easy access very frequently.
Lower rates on higher amounts
Occasionally the rate of interest on an account will actually fall if the cash invested is higher than a certain amount, so again it’s important to be vigilant when opening an account. Check the rate that you will earn on the amount you invest and that you can add to it without detrimentally affecting the interest rate.
Some accounts may involve a combination of these tricks so check our notes and read the terms and conditions carefully before proceeding.
Taxation of Savings Accounts
With the exception of Cash ISAs, savings accounts are normally taxed at source using the basic rate of tax. What this means is that the 20 per cent basic rate of tax has been deducted before the savings account interest is paid out. This makes it really easy for basic rate tax payers.
Non-taxpayers are able to receive the interest without tax deducted, as long as they declare their tax status to their savings provider, by completing an R85 form. If no R85 has been completed, 20 per cent tax will be deducted at source and you will need to reclaim this.
A Higher or Additional Rate tax-payer, will also receive interest with 20 per cent deducted at source but they are liable to pay the difference between the 20 per cent deducted and their personal tax rate. Each year the savings provider will produce a Certificate of Interest Paid that will indicate how much interest has been paid and how much tax has been deducted, to aid with the calculation of how much tax is still to be paid.
Taxation is a complex subject and this information is for guidance only. If you are unsure you should always check with a tax expert.
We are here to help you to choose the right savings account, to decide whether savings are right for you or to answer other questions you may have about savings. Please feel free to email us or call on 0800 321 3581.