Choosing a Savings Account

TMC_Aspirational_001R

Whether you are a great fan of DIY, or have a house full of wonky shelves, you will know how important it is to have the right tool for the job. Well the same applies when selecting a savings account to keep your hard-earned cash in. Choosing the right account for your money is essential for looking after your investment and achieving your aspirations; which is why we are here to lend a helping a hand!

Once you have decided what you are saving for (your big day in a year’s time, or just to know that you have enough money to retire), it should be easier to work out whether you will need the money in the short, medium or long term. So to help you decide on the right savings tool for the job, here is an introductory guide to choosing the account best suited to your situation…

Short-Term Savings

If you are investing money that you will shortly need to access (typically up to five years) then you need an account that will let you do just that.

Different accounts have different notice periods (or times for which you will need to wait for your cash):

  • Instant or easy access accounts will typically allow you to immediately get your hands on the money if you need it – and are therefore often a good idea for any emergency stash you might have built up.
  • Fixed-term deposit accounts mean that you have agreed to leave your money in for a particular amount of time and will be penalised if you try and take it out before then. This could be for a year or more depending on the product. These work well if you know you have money that you can lock away for a certain amount of time; if you are given a gift from parents to put towards a deposit on a house for example.
  • Regular savings accounts work on the principle that you agree to contribute a certain amount each month, normally for a fixed time period. If you are saving for say a wedding in a year’s time and know you can afford to save a fixed amount each month, then this might be a good option.

As a general rule of thumb, the longer you are prepared to lock your money away or commit to regular saving, the better interest rate you will get.

Just as important, if not more so, is tax treatment. If you pay tax (particularly if it is at the higher rate) then it is nearly always a good idea to use your tax-free allowance first. This means looking at a cash ISA (or Individual Savings Account). These allow you to save up to a certain limit (£15,240 in the tax year 2015/16) without paying any tax on the interest you earn. Just like a regular savings account, there are a range of these available (instant access, fixed term, regular savings etc). The key differences being you can save tax-free, but there is a maximum amount you can save, and if you are up to the limit and then remove your cash, you cannot reinvest it in the same tax–year.

For further information on savings accounts available, please see Savings.

Medium-Term Savings (two to five years)

If you know you are able to keep your savings tied up for a minimum of two to five years, it is likely that you can achieve slightly higher interest rates than those offered for easy access accounts. In which case, you may decide to look at fixed-rate bonds, as well as considering longer term notice periods on savings accounts.

Normally, the money in a fixed-rate bond account will pay better interest than a savings account, but you need to be aware of the potential downside; you may find that they are inflexible. For example, some don’t allow you to make additional deposits, withdrawals or close the account during the fixed term. Also, the provider may offer the higher interest rate only if, for example, you also open a current account.

You should always consider whether or not you have used up your cash ISA limit first, and whether or not you can get a better deal through using that. Obviously this depends on the interest rates available at the time, but (particularly if you are a 40% tax payer) you are unlikely to be able to better a tax-free rate. So shop around and make the comparisons.

Long-Term Savings

You may be saving for a big purchase in the future, possibly the kids’ university fees or your retirement. Alternatively, you may not have a specific goal in mind and have just decided to start making positive steps to securing your future income. In either case, the way you choose to save will depend on how safe you want your money to be and how much risk you are willing to take.

With longer-term savings (typically for at least five years) you can still choose any of the options set out above. Saving your money in this way is the safest and most secure way to ensure your future. But, for those of us who are prepared to take more of a risk, investing (rather than saving) might be worth considering.

Investing is a much riskier way to save because it is possible to lose money, rather than make it. And the golden rule is that you should NEVER invest money that you can’t afford to lose, or at least make a loss on. As with savings, investment products range hugely, both in terms of complexity and risk.

If you want to (and can afford to) dip your toe in the water, a stocks and shares ISA might be an option. This is similar to the cash ISA in that it allows you to keep the returns you make tax-free, but the crucial difference is that your cash is invested in stocks and shares rather than in a bank account. This means you could lose some or even all of your money. Some companies provide packaged stocks and shares ISAs meaning that the decisions on where to invest are taken for you. This could mean that this is less risky than you just taking a punt yourself, but there is still no guarantee. If in doubt, take professional advice; www.unbiased.co.uk is a good place to start.

Other investments include basic stocks and shares, but also Unit Trusts, Open-Ended Investment Companies, Investment Trusts and Venture Capital Trusts and many more. In all cases, if you are thinking of venturing into this more complex market, we suggest that you seek unbiased, whole of market advice.