Save smart with UK savings accounts
Is saving always the right option for your money? This guide will take you through some of the complexities of saving in the UK, from high interest deposit accounts to ISA savings and more.
Work hard AND save smart.
To Work Towards Something Later
Our society tends towards the instant gratification of getting the thing you want now and worrying about paying for it later – we live in an age of credit cards and loans while the age-old tradition of saving up for something has lost some of its allure. It is easy to see why – saving takes patience and discipline, and also is less adaptable to the fast pace of modern life, or dealing with sudden emergencies.
However, there is a price to pay for that instant access to other people’s money – a literal one. Paying interest on the things you buy increases their cost to you considerably and it is easy to slip into a trap where a £100 item actually costs £130 or more by the time it is paid for.
Saving allows you to keep your money for yourself, and use interest rates in your favour. A good saving strategy can give you the kind of rewards that make it feel like a significant pay rise!
There are also some things where saving, rather than credit, is really the only way – the most significant being a deposit on a mortgage. In this instance, your saving the capital is a way of showing the mortgage lender than you are a reliable and low-risk investment for them.
For a Rainy Day – Or Worse
Most personal finance experts will agree that having savings equal to three months of your essential outgoings is a good rule of thumb.
Life is unpredictable, and things happen over which we have no control. As recent events have shown, even the most stable jobs can collapse overnight as companies enter liquidation, or you may become ill and suddenly find yourself unable to work. Statutory sick pay might help keep you on your feet, but there’s nothing like having a financial cushion in place.
Saving for unexpected emergencies can be difficult but should be part of your monthly budgeting.
For the Future
As we build a family and watch them grow, it becomes more desirable to begin saving for the future – whether that is to have something to leave them once we’re gone, or to help them in their early adult life with university fees, wedding costs or that first rung on the property ladder.
Saving for the future tends to be with higher amounts, and that’s where looking at the savings options available becomes important.
In essence, a savings account is just a place to hold your money safely while you are not using it. It differs from a current account in that there are not expected to be a large number of transactions in the account and the money will remain there for longer, as a consequence the bank or organisation holding the money is willing to offer a higher rate of interest than most current accounts.
Why Do Banks Want You to Save?
A bank works by taking the money from one place and using it in another. In its simplest form, the money they are holding for people can be used to lend to other people – so the longer and more reliably you leave your money with them, the more they can use it to make money lending to others. Of course, the system is many times more complicated than this example, and your money is guaranteed safe by the Financial Services Compensation Scheme (FSCS) up to £85,000.
Interest is paid to you to entice you to keep your money within the bank system and not take it to a competitor (or worse, hide it in a mattress!).
Easy-Access Savings Account
A very simple form of savings account, the easy-access savings account allows you to withdraw your money from the account at no notice, although some accounts may have a cap on how much you can withdraw in a given period.
The advantage of having fast-access to your money does mean that most easy-access accounts have a slightly lower interest rate – as explained earlier, the more security they have that they can use your money, the greater interest they are willing to pay.
There are usually no rules to when, or how much, you pay in. Like a grown-up piggy bank, you can put money into your easy-access savings account when you like and in whatever amount you like and whatever is in there will generate interest at the end of each period (usually monthly or annually).
Be aware that some accounts advertised as easy-access are less flexible than others. Some have a fee on withdrawals, or heavily limit the amount that can be taken out a month – do check the terms and conditions before choosing your account.
While many savings accounts have a variable interest rate that changes with the national interest rate and other factors, a fixed-rate bond account offers a guaranteed interest rate across a set term, and this rate is almost always higher than one offered by an easy-access or similar account.
The upside of this is a guaranteed return on your investment and the ability to plan accordingly, as well as that higher rate of interest, but your money is locked in during the term and you can’t withdraw it at all until the term ends (usually a year).
It is designed for people looking for a longer-term savings solution and isn’t suitable for savings accounts that need to be accessed in an emergency.
As a middle ground, notice savings accounts are those which offer a better rate the longer a notice period you give – this notice may be a month, 90 days, or longer. What this means is that your money is locked but can be withdrawn after the notice is given – you simply declare a need to withdraw and once the notice period is up the funds are made available to you.
Like fixed-rate, the interest is almost always superior to an easy-access account, but unlike a fixed-rate account, most notice accounts have a fluctuating interest level.
Though not traditionally thought of as a savings account, your own current account will pay interest on a positive balance and this can often be at a very reasonable rate – sometimes even competitive against easy-access accounts.
Of course, as it is a current account, you have instant and unlimited access to your money at all times, although that can be a hazard as much as a bonus as the temptation to spend is always there!
Many online-only accounts exist that offer very competitive rates. Without the overheads of running a branch, there is an opportunity for online banks to beat the high-street rates. Online banks are growing in popularity and many have excellent mobile apps to help you track your finances and have a greater level of management over your money.
Local Branch Accounts
Conversely, many local building societies offer excellent rates in branch. While they do not have the ease of access that comes with the national banks and institutions, they can be an excellent option for people settled in an area and unlikely to move away.
Changes in regulation from 2016 mean that savings interest is now paid tax-free up to a threshold – this is called the Personal Savings Allowance (PSA):
First £1000 of interest earned tax free for those in the lower (20%) tax bracket.
First £500 of interest earned tax free for those in the higher (40%) tax bracket.
No tax-free interest for those in the top (45%) tax bracket.
Note, that it is £1000 (or £500 for higher earners) of interest earned that is tax free, which is likely to cover most people’s total interest earnings. At an impressive 3% of interest, you would need to have over £30,000 in savings before you paid any tax in the lower bracket, and with most easy-access savings accounts accruing a more realistic 1.3%, it is closer to £90,000 of savings before tax becomes an issue.
This change in tax on savings means that the traditional ISA is of less use to many than it has been, but it still exists and is of great use for those with larger amounts to save, or in higher earning brackets.
What is an ISA?
An ISA (Individual Savings Account) is a scheme which allows individuals to save cash, shares or unit trusts free of tax on their interest or dividends.
When saving cash, it allows you to save as much as £20,000 per year without paying tax on the interest, and ISAs have long been a first port of call for anyone building savings. However, with the slightly lower interest rates generated by most ISA accounts, the PSA threshold makes using a traditional savings account often the best choice.
Speak to one of our advisors regarding your savings choices for more expert advice!
£85,000 of Protected Savings
After the catastrophic financial turmoil of 2007, it is reasonable to wonder if your savings are protected should the bank or institution holding them fall. Thankfully, the FSCS (Financial Services Compensation Scheme) guarantees all savings in UK regulated institutions up to £85,000 per person, per financial institution and will ensure you get your savings back should anything calamitous happen to your bank.
If you have savings that exceed the limit, then simply splitting them between banks is enough to guarantee the greater amounts. Look to break your larger assets between institutions to have all your savings protected.
With all this talk of gaining interest and protecting your money, it can be tempting to open a savings account immediately – be careful though, as this many not be the best way to maximise your money.
There is one time when saving is not the best thing to do, and that’s when you have debts on which you are paying interest.
If you have an overdraft, a credit card bill, or a personal loan then you are paying interest on that credit and it is almost guaranteed to be a higher rate than you will earn with your savings.
Savings of £1000 in an easy-access account will typically return £13 to £15 a year in tax-free interest.
A balance of £1000 on a standard credit card will typically cost £100 to £190 a year in interest!
It is easy to see that clearing debts before saving leads to a far better return on your money. Look at the terms of your credit agreements, including your mortgage if you have one, and see if they can be paid off early without paying any fees. Look into all aspects of your finance including monthly direct debit payments for insurance or bills and see if you can move to an annual system which might lower any interest or fees and make your money work for you the best way it can.