Understanding savings24 October 2017
There are lots of ways to save for the future and make some interest on the money you put aside. But interest rates have been historically low for some time in the UK, so what can you do to maximise your returns?
There are thousands of accounts out there, all paying different rates. But the best for you won’t necessarily be the one with the highest headline rate of interest. Other aspects might be more important - like how quickly you can get hold of your money if you need to, or how it will impact on your tax affairs.
Most savings products available in the UK fall into one of the following groups, and have similar rules and characteristics. It’s a good idea to start by identifying which type suits you best, and then comparing different accounts within that group before you make a deposit.
Easy access accounts
There’s a clue in the name - with an easy access account you can take your money out whenever you want. Most providers will let you open an account with a small balance, and you can often operate your account online, making it easy to move funds from your current account to your savings, and vice versa.
The downside to easy access is that interest rates tend to be lower than some other types of accounts. Also some providers use temporary bonuses to attract new customers, so the rate looks good at first, then drops to a disappointing level after a qualifying period. Other providers - including Shawbrook Bank - offer clear, consistent and competitive rates.
While easy access won’t always earn you the best rates, it’s good to have cash easily at hand if you need it. You might consider putting some money into easy access, even if you lock up the rest of your savings for a longer period.
With a notice account, you have to tell your provider in advance when you want to take all or some of your money out. This makes it easier for the provider to plan ahead, knowing how much they’ll have on deposit. In return, they’ll often reward you with a better rate than you’d get with easy access.
Typically, notice accounts require you to inform your provider 60, 90, 120 or more days before you want your money. Depending on the account terms and conditions, sometimes you can still get your cash in a hurry if you need it, but you’ll pay a penalty and lose interest. Other providers will only release funds after the notice period.
So notice accounts are not suitable if you think you’ll need access to your funds in an emergency. But if you’re saving for something in the medium term, like a wedding or school fees, and know when you will need access to your deposit in advance, they could work well for you.
Fixed term savings accounts
If you’re happy to tie your money up for a specific period of time, fixed term accounts or bonds will provide a higher rate of interest than most other forms of savings accounts. It’s important to read the small print, though, as different terms and conditions apply to different accounts. Some will let you take out funds with a penalty, while others don’t allow withdrawals at all.
One advantage of fixed-term accounts is that the rate will stay the same for the period of investment, whether that’s one, three, five years or whatever. As a saver, you’ll know exactly what you’re going to get back when the product comes to an end, or ‘matures’ as the terminology has it.
You can save up to £20,000 (during the 2018/19 financial year) in an Individual Saving Account or ISA and keep all the interest you earn without paying tax, irrespective of your other tax liabilities. There are stocks and shares ISAs – which are investment products so their value can vary - but Cash ISA products are simply savings accounts with a tax-free ‘wrapper’, and pay interest rates as advertised.
As with other savings products, Cash ISAs come with different terms and conditions, and either fixed or variable interest rates. One thing to look out for is whether or not previous year’s ISA allowances can be 'transferred in’. This allows you to transfer and hold ISA savings from several years and several providers in one Cash ISA, but not all Cash ISA products allow it.
Most savings accounts available in the UK fall into these main categories. Others, like children’s accounts aimed at parents and grandparents, and special accounts for older savers, are generally variations on these themes. Although they may come with some attractive freebies or gimmicks, you should always look at the rates as well as the terms and conditions before committing.
Most savings and current accounts offered in the UK are covered by the Financial Services Compensation Scheme (FSCS). If for some reason your provider were unable to repay the money you’ve deposited, the FSCS would reimburse you up to a maximum of £85,000 (£170,000 for joint investors). It’s important to realise this maximum applies to the provider not the account - so if you have two or more accounts with the same bank, you’re still only covered up to the £85k (or £170k) limit in total.
Some foreign banks and other financial institutions active in the UK are not covered by the FSCS - and therefore you wouldn’t necessarily receive compensation if they were to fail. It’s easy to check if a provider is covered on the FSCS’ own website. Deposits made into Shawbrook Bank are covered by the Financial Services Compensation Scheme.