A guide to savings accounts
Many people are beginning to assess their personal financial situations in light of the current economic climate, recent changes to investment taxation and changes to pensions. One of the most popular and most efficient ways to save for the future is to open a savings account. Whether this is for yourself, your spouse, your children or to eventually supplement your pension, there will be an account out there to suit your needs – it could just be finding the right account that may be the most hassle.
With the current emphasis in the press and on the grapevine to look after your money and save, be aware of what you have put aside for a rainy day and invest for the future. People are even more interested in where their money is, where it is going and the level of interest that will be paid on it. With increasing interest from Joe Public and the surge in product range, taking the time to work out what is the most beneficial for your individual circumstances can be the hardest part of the whole process.
There’s the initial choice between banks, building societies and investment companies to contend with. Which type of banking organisation will suit you best, and which has the product you need? Even at this first stage, there are so many questions to ask that your mind might start to wander and putting the cash in a box under a bed might just feel like the best option. Don’t. There is something out there for everyone - you just need to guide yourself through the minefield that is savings accounts to ensure that you have conducted all the research you need.
When purchasing any financial product, it is important to base your decision on four main factors; the amount you can invest; the rate of interest; the ease in which you can access your money and the risk factors of the account. You will find that the highest interest is paid on the accounts that potentially have the highest risk. This should be a decision based upon your current situation and the reason behind taking out the account or bond. Talk to your financial advisor, building society or bank representative and they will be able to give you the information you need on their particular accounts, their interest rates and their risk factors. Comparisons from moneysupermarket.com can also help remove the clutter from the key information and compare similar products from different financial institutions.
Putting your money into savings bonds or individual savings accounts (ISAs) are two of the most common ways to save your money. These are so accessible because they are offered by your high street bank or building society, but they are also offered by investment companies and recommended by financial advisers alike. These are seen as high interest savings accounts although the more risky investment bonds and investment trusts do usually offer a higher return, but at the cost of the higher risk that’s involved.
When looking to see if a particular bond is for you, the main points to take into account are how much you have to invest and how long you must invest for. Different banks and building societies have a minimum amount that you must invest but this varies from provider to provider.
Savings bonds work on the basis that you will receive a fixed amount of interest over a fixed period of time. These are popular with both the customer and the financial institution. The customer knows the interest they will receive at the end of the fixed term and the financial institution has the guarantee that the funds will be in the bond for a set period of time.
There are downsides to bonds; primarily, early encashment. This is where you cash in your bond early. It can be detrimental and can result in the loss of some if not all of the interest you have accumulated. Ensure you are comfortable that you will not need the money within the fixed term of your bond, otherwise taking out a fixed term bond may not be the correct option for your circumstances. This should be a factor when considering taking out a savings bond.
Individual Savings Accounts (ISAs) come in a couple of different shapes and sizes but the bottom line is the same across the board. You can invest up to £7,680 each tax year without having to pay tax on your investment. This figure rises to £10,680 if you are over the age of 50. It’s the high amount that you can pay into an ISA without taxation that makes ISAs so appealing. You can keep half of your investment in cash but if you exceed this, you must invest your ISA capital within shares. You should choose these shares according to the level of risk you are willing to take; usually the highest return comes with the highest risk investments.
When taking out an ISA, you should take into account that you can only invest up to the taxable amount per year. If your yearly investment will exceed this amount, it is recommended to look elsewhere for your account. One of the more positive sides to taking out an ISA is the flexibility it offers. You do have the availability to take some or all of your investment out of the account. The basis that this is done on will depend on the individual savings account product that you take out so make sure that you observe this in the terms and conditions before opening the account. With the flexibility comes some negative flexibility; interest rates are not usually set and can fluctuate – this is predominantly determined by the Bank of England base rate.
Also available are ‘mini’ or ‘cash’ ISAs - these are generally for smaller savings investments and are usually provided by banks and building societies only. You will be able to invest a smaller amount each tax year, the current limit being £5,340. Although the total tax-free limit is much lower than a regular stocks and shares ISA, you do not have to invest any of this capital in stocks and shares. Cash ISAs also provide you with the flexibility to withdraw your cash as and when you wish to.
Many people also wish to consider savings for children. These accounts are also mainly offered by banks and building societies and less so from investment companies. This is because children’s accounts tend to generate less capital because parents will not generally invest as much as they would in their own account. It is a common misconception that children do not pay tax on their savings - while this is generally the case, the only reason that there is no tax paid is because the accounts do not usually exceed the £7,475 tax free allowance. Once this is exceeded, tax will have to be paid on the account. The highest interest rate for a children’s savings account is currently with Halifax. Its rate is currently 6% for the first year. Anyone can open an account for children as long as the child is under the age of 16.
There are many products on the market to choose from and the most important thing you can do is establish exactly what it is you are looking for, and conduct as much research as possible before making an investment.
