Savings

Understanding the value of saving is beneficial in itself, but making an individual choice about where to deposit your money in order to get a good return on your investment, maximise the available interest, or take advantage of tax-free accounts, is invaluable…

What is Saving?

Saving is the practice of putting away or storing money for future use. Most of us have to make a conscious effort to put aside some of the money we have left each month after paying for the essentials; bills, travel, food etc.  However, if you only ever wait until the end of the month to save what you have ‘left’, you may find this isn’t very much. And that long awaited family holiday starts to seem further and further away!

There are lots of different types and forms of savings, so it is important to consider all of your options before you rush into anything. Take your time, weigh up the pros and cons (outlined below) and then decide the best course of action for your hard earned cash.

Why might I need savings? 

If you want to be able to do or buy something in the future and/or have some money put aside for an emergency fund. For further information on some of the great reasons to save visit Saving – the habit of a lifetime.

What types of Savings are there?

  • Deposit – you put your money in some form of account and it gains extra money called interest. The interest might be paid monthly or yearly and is quoted as a percentage (if you save £100 for a year at 3% interest, at the end of the year you’ll have £103). Interest counts as part of your income and you’ll pay tax on it.

Tax is deducted from your interest by the company you save with, if you don’t pay tax you can sign a form and they’ll stop doing this. The Financial Services Compensation Scheme provides you with free and automatic protection for your savings, up to £85,000 – or up to £1m if the money’s only in your account temporarily, for example if you’re moving house or receive a large inheritance. If anything happens to your bank, building society or credit union, the FSCS automatically refunds savings up to £85,000 within seven days. You won’t have to do anything. It gets a bit complicated if you have more than one savings account – check out the FSCS’ (link to http://www.fscs.org.uk/) website to find out more.

  • Investment – you put money into an account and it is used to buy stocks, shares or other slightly complex financial products. When you want to take your money out, the products are sold and you get the sale price less some fees to the account provider.

This type of saving carries risk, you might not get back all the money you put in – but on the other hand you might make much more than you would in a deposit account. You lessen the risk if you are saving over a number of years and don’t have to take your money out at a specific time – this enables you to ride out storms in the stock market.

  • Regular Saving – as the name implies this is where you commit to making regular (usually monthly) payments into a savings product.

This is a good way of building up a pot of money. If the product is conditional on you making regular payments, you may lose interest if you fail to make a payment.

  • Lump Sum – this is where you put a block of money into an account and leave it there for a bit.

In some lump sum accounts you can only put in a single amount when you open the account, with others you can add to the pot as you go along.

  • Instant Access – this means you can take your money out with no loss of interest as soon as you ask for it.

You tend to get a lower rate of interest for the flexibility of being able to get at your money whenever you want to. It does make it easier to dip into your savings if temptation strikes, which is not always a good thing.

  • Notice Accounts – you have to tell the account provider a specified number of days before you want to take your money out.

Normally you can have your money quicker but you will lose some of the interest (if the account hasn’t been open for a minimum length of time you might lose all the interest).

  • Long Term – these are savings products that are designed to run for many years and will have little or no value if you try to access them early.

These products are usually of the investment type and would be used to do something such as pay off a mortgage.

  • Tax-Free – there are a few special accounts that allow interest to be paid without tax being deducted. You are limited in the amount you can save in each tax year.

The accounts are usually called ISAs and they can involve cash and/or stocks and shares elements. There is an overall limit to how much you can save, but a lower limit on how much can be in cash – the rest has to be in stocks and shares. You don’t have to be able to save the full amount to take advantage of the scheme.

For further tips and advice on what to look out for when thinking about savings options visit Tips for Choosing a Savings Account.