Are savings accounts any good?
If you’re short for time, and by this we mean less than five years, saving should win the saving versus investing debate. It’s also a good idea to create an easily accessible ‘rainy day’ fund of about three months’ salary for dipping into when the unexpected happens such as a boiler, roof or car needing repair.
Savings add balance to the risk you take when investing other slices of your wealth because they are, well, safer. For starters cash is not an asset that loses much value (except by inflation, but in the short term this is negligible) and the government protects savings of up to £85k per financial institution.
Don’t expect much in the way of returns though as unfortunately there’s little you can do about low interest rates currently; they’re at all-time lows and unlikely to rise quickly anytime soon.
Almost all of us have current accounts, but when it comes to savings, options extend further than these. To start with, there are tax-shelters such as Individual Savings Accounts (ISAs) which shield your capital gains or interest income from the taxman.
There are different types of ISA for cash and for shares and recent changes mean you can split the new limit of £20k across various ISA wrappers however you like, which means ultimately you could shelter £20k of your savings tax-free in a cash ISA.
But to be honest a cash ISA might not be necessary – in April 2016 the government introduced the Personal Savings Allowance (PSA), which means those on the 20p tax rate can earn a whole £1k in interest outside of an ISA and pay no tax; on the 40p rate it’s £500. With interest rates so low you would need a lot of cash to exhaust these limits.
Account-wise there are various options, differing in the conditions of use and interest received (generally their conditions are based on access because banks are using your deposit money elsewhere so need to restrict availability to your savings).
Instant access savings
Vanilla savings. Take the money whenever you want; you’ll get the worst rates for the privilege.
Notice savings accounts
In these accounts you’ll need to give the bank a heads-up prior to withdrawal, with waiting periods attached such as 30 or 60 days. In theory you should get a better rate of interest but check because these days they’ve been known to be as equally bad as instant access savings.
Also known as savings bonds or fixed term savings, these accounts give the best rates in exchange for the strictest classroom-esque conditions i.e. there will be no withdrawals allowed during the timeframe and a fixed amount to pay in; missing either of which will result in account closure and the resetting of rates to much lower levels. There’ll be limits on the amount you can save as well, say £10 – £500 per month.
These are supposedly the primary savings vehicle in the UK, with £63bn worth in issue. The interest you receive on the amount you save is ‘won’ in a national lottery, and is tax-free (again, for most this won’t matter because of the PSA). It was launched in 1956 by then Chancellor, Harold Macmillan.For each £1 bond the ‘prizes’ range from £25 up to £1m. Odds are slim though, with a £25 prize requiring a 1 in 30,000 needle-in-a-haystack scenario (don’t even ask about £1m). Of course if you don’t win your money has still been locked away, and you’re allowed to buy £50k’s worth of these bonds.
Savings – a yawning dullard in terms of returns but a much safer endevour than any form of investment. These types of accounts come first as a way of saving easy to access cash, which will be needed from time to time, or as a way of locking away cash for shorter periods of time, earning modest amounts of interest in the process.