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Savings Accounts
You can get a savings account with a multitude of different financial institutions including banks, building societies, online banks, savings and mutual savings banks.
Savings accounts take various forms where there is often a correlation between how accessible your savings are compared to the interest rate payable on your savings by the financial institution. This may cause inconvenience if you need to access your money quickly so it’s worth bearing this aspect in mind. All savings accounts offer itemised lists of all financial transactions, traditionally through a statement that can be accessed online and/or posted to you a monthly basis.
Saving are always a good idea no matter how much you actually put into your savings account as you never know when that rainy day will come. It can provide you with a cushion should the unexpected happen and often savings allow you to be in control of your money rather than the other way round.
Savings Guide
Saving is the safer way of building up a nest egg for later in life when you may need to provide yourself with additional funds or save up for that special purchase. It’s a simple principle where the more you pay into the account the greater the sum amount of interest you will receive. Its also less risky as compared to buying stocks and shares as method of saving as the value of your money wont go down in a savings account whereas you run the risk of losing money if the shares you buy reduce in value.
Obviously the more you save the more interest you receive and if you leave that interest in the account then you consequentially paid interest on the interest already received as well as the capital amount you have already put into the account. This is the definition of compound interest. Remember though that unless you are using an ISA savings account then you will be taxed on a proportion of the interest gained as the government class this as a from of income.
In order to compare savings accounts then the AER (Annual Equivalent Rate) is often used as a measure to compare savings accounts. This measure shows the percentage of interest earned on savings on an annual basis taking into account aspects such as the frequency of interest payments.
Savings accounts can be classified into various different savings types and the different savings accounts suit different people. The general savings account types are as follows:
Easy Access Accounts
Notice Accounts
Term Accounts
Regular Saving Accounts
Tax Free Accounts
Easy Access accounts
These are the most basic type of accounts where you get easy instant access to your savings and you don’t need to give the bank any warning that you will be withdrawing funds. There is also no financial penalty for withdrawing money. As we mentioned earlier there is a relationship between the flexibility of access and the amount of money paid on your savings in interest so you would typically achieve a lowest rate of interest on this type of savings account. The other plus point is that you usually only need a small amount of money to start your savings - typically £1 so it easy to start saving!
Bear in mind that the interest rate will be linked to the Bank of England base rate so it will vary according to movement in the Bank of England base interest rate.
Pros of Easy Access Savings accounts
Little savings start up costs - usually £1
Immediate access to your savings
No notice or penalties on savings withdrawals
Cons of Easy Access Savings Accounts
Usually the lowest rate of interest available for savings accounts
Notice Savings accounts offer a strong rate of interest but the trade off for this is that you have to give a defined period of notice before you are able to withdraw funds. The range of notice can run from 7 days to 120 days with a corresponding level of interest. The usual notice period is between 30 and 60 days notice and where if these criteria are met then there are no penalties. If you need to breach the notice agreement to obtain quicker access you your money then you are likely to lose any interest for the period of notice you should have given.
Pros of notice accounts
Higher interest rates than Easy Access accounts.
The format which penalises savers who do not give notice encourages you not to withdraw which will help you build up your savings.
Cons of notice accounts
If quick access to your savings is required then you will be penalised in the form of loss of interest for a defined period.
These type of accounts usually provide the highest interest rates as you are depositing the money for a specific term period. Once the money is deposited you cannot usually add any further deposits and the period is from 1- 5 years. There is very little room for withdrawals during in the terms and the penalties are significant.
Pros of term accounts
Usually the highest interest rates are paid on these accounts
Suitable for those who do need access to funds for long periods
Cons of term accounts
Interest rates are fixed at the start of the term so if interest rates rise you will not benefit.
Short notice access to your money will be very difficult.
Regular Savers Accounts
Regular Savers accounts is one of the more structured bank savings accounts available on the market. The interest rate payable is usually structured so that you have a main rate and then additional interest payment is made where certain criteria are met such as a certain amount of deposits into your account and not more than the restricted number of withdrawals are made either. If any of the criteria is not met then the highest interest rate will not be paid.
Pros to Regular Savers accounts
A set amount is transferred into the account each month which will rapidly build the savings.
Most regular savings account will track market interest rates so you will benefit from any rise in rates.
Cons to regular saver accounts
There are fixed minimum/maximum levels of monthly savings deposits required so you cannot save less or more than these levels each month.
To achieve the higher interest rates you have to stick to the deposit/withdrawal criteria
ISA are a very appealing savings accounts for taxpayers, opening up an ISA is a good choice because all the interest is your to keep as you are not taxed by the government on these savings. The limit for a cash ISA is £3,600 each tax year into a cash ISA, or if you choose a stocks and shares ISA then the limit is £7,200 in a stocks and shares ISA. The ISA account runs according to the tax year which is 6 April to 5 April, so you need to try and maximize your tax free savings allowance. You have a choice of using the £7,200 allowance to invest into a stocks and shares Isa or you can divide it up where £3,600 can be invested into a cash ISA savings account. Cash Isas operate in the same way as other savings accounts but the advantage is obviously the fact that you don’t get taxed on the interest. Various account formats are available with different interest rates according to access required, withdrawal limits etc similar to other savings accounts
Pros to Cash ISA Savings accounts
Your savings are tax free.
Cash savings Isas are available no withdrawal restrictions so you can get easy access.
Cons to Cash ISA Savings accounts
To achieve higher interest then the access maybe limited
Need to be careful when transferring between ISA accounts if you wish to maintain the tax free status of the money.
The opinions expressed are those of the author only. The material is for general information only and does not constitute legal, financial or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation by an FSA authorised company where the market is FSA regulated.