- By Malcolm Anderson
- Published 05/3/2012
We all want a secure place to store our hard earned money – whether to have it on hand for a rainy day, or to save for something special in the future. Savings accounts are a great starting point, and the key to long term security is to play the field for the best interest rates, and grow the money as you save.
These days, there are hundreds if not thousands of different savings accounts on the marketplace, each offering unique features and bonuses.
If you do your research and make smart choices, you could end up saving more than you expected, so look at this guide for a useful overview of the main savings account choices available in the UK market.
Difference between Savings and Investments
First, it’s important to distinguish between saving and investing. The former entails opening a ‘deposit-based’ account where you can simply squirrel away the money you may not need on an everyday basis (you can still access funds for withdrawals with relative ease whenever you please, subject to the specifics of the account e.g. instant access, 90 day access etc.).
Thus, the general savings account can be used for relatively short-term saving, allowing you to have that extra money readily to hand if you need it. Your money will be secure and entirely yours, but the interest rates offered are usually low.
With investments, you run the risk of losing some or all of your money, but with risk comes potential gain – if things work out, you could end up with a significant return.
Nevertheless, if you are new to financial planning, the landscape of stocks and shares or property can be challenging, so it may be advisable to take input from a seasoned Independent Financial Advisor (IFA) – they will usually have the unbiased expertise to guide your investments at a level of risk that you’re comfortable with.
Main Types of UK Savings Accounts
Savings accounts generally fall under the following main categories:
Instant Access Accounts
This is the simplest method to save your money, since you can usually start off with just £1, get easy access to your cash when you want it, and have a variable interest rate which moves up or down with the Bank of England base rate (BOEBR). Generally, you will get the best deals on internet accounts, but it must be said that these types of savings accounts do not carry impressive interest rate returns.
These accounts usually require a few hundred pounds to open and they are designed for more disciplined saving since they carry a fast withdrawal penalty fee. If you want to access your funds without penalty, you will have to give notice of 30, 60, 90 or even 120 days. If you can’t wait, your penalty will usually be calculated on the amount you take out and it will equal the interest rate for the notice term.
Regular Deposit Accounts
If you’re serious about regular saving, this is a good account to opt for since it will require you to invest a certain amount each month. To deter you from withdrawals, these accounts allow only limited withdrawals and while some are easy access, others carry penalties for taking money out or missing monthly deposits.
Fixed Rate Accounts
As the name implies, with this account your interest rate will be fixed for a set period. While this is a good way to go if you’re worried that the BOEBRwill drop on variable rates, it also means that you won’t benefit if the BOEBRtakes an upturn. All in all, choosing a fixed rate account can be advantageous if you’re planning to lock your money away.
Individual Savings Accounts (ISAs)
These types of accounts make for excellent savings and investment vehicles as they feature an annual tax-efficient ISA allowance.
There are two types of ISA – Cash ISAs and Stocks & Shares ISAs. The former is an excellent savings account since Cash ISAs are simple and carry interest rates that can be more generous than many equivalent non-ISA accounts. Stocks & Shares ISAs involve building an investment portfolio based on stock market investment.
Here are some key considerations when considering ISAs:
• Try not to withdraw your money as once you’ve invested the limit of your tax-free allowance, you cannot top it up again.
• If you’re switching ISAs, do not simply withdraw the cash as you will lose your tax-free wrapper – instead, let your new bank or building society handle the transfer.
• Cash ISAs are safe and excellent for shorter-term savings, while their Stocks and Shares counterparts are more risky and are best invested for the long haul.
Please do remember, the eligibility to invest in an ISA will depend on your individual circumstances, and all tax rules may change in the future.
About the Author: Malcolm Anderson is an independent journalist with an interest in investment funds.