Savings Accounts and Rates
When searching for and selecting the best savings account for your circumstances, don’t just consider the interest rate that you will receive for depositing your cash. There are many things to think about before pushing your cash over a building society counter. Indeed, one of those things to think about is whether the building society is the best place to save. Taking the process of saving one step at a time is as easy as ABC.
Account types fall into two main categories:
- Instant Access accounts allow you to withdraw savings at any time, without notification and without penalty. Whilst these are great for emergency cash needs, they often offer the lowest rates of interest for your savings.
- Notice accounts also allow you to withdraw without penalty, but you will have to give the account provider notice of your intention to withdraw cash. Typically the notice period required is 30, 60, or even 90 days. This is great for those that are saving for special occasions and want to remove the temptation to use cash that will be needed at a later date. But if you want to withdraw money early, then you will pay a penalty: and this could be as much as the entire interest on your whole deposit for the notice period. However, notice accounts often have a better rate of interest attached than instant access accounts.
Under these two main categories come certain sub categories.
You could select to save regularly, usually monthly. This gives discipline to your savings, and a little put by each month soon mounts up. However, don’t forget that the interest rate, though it might be attractive, is only paid on the amount you have on deposit for the time that it remains on deposit. That interest rate of 5% might look attractive, but you will only receive 1/12th of 5% for the final month’s regular payment into the account. If you have a lump sum available to save, it might be better to put the whole amount away in a lower rate account at the outset.
A fixed rate account will often pay a better rate of interest than many other accounts, though you will be committed to your cash being tied up for a period of time. These accounts are often called cash bonds and will have lifetimes typically between 6 months and 5 years. The longer dated the maturity of the bond (when your money will be available to you), the higher the interest rate. Withdrawing money early will incur quite a penalty. While this type of savings product is good for those that want to know exactly how much they will receive at the end of the savings term, and if interest rates fall they will still receive the same interest rate, it has to be remembered that if interest rates rise, the rate ion a fixed term bind will not rise.
Whatever type of savings account is most suitable to your needs, you should always make use of your Cash ISA allowance (unless you are using it in a Stocks and Shares ISA): by doing so you will not pay tax on the interest made on your allowance amount.
Bank, Building Society, or Other?
The choice here is large. There are many banks and building societies that offer all types of accounts, and competitiveness changes almost daily. Whilst the interest rate available will probably be a key concern, it shouldn’t be the only one.
Think also about where the bank or building society is: a travel of 10 or 15 miles and then the difficulty of parking and the time it takes to visit your bank could quickly wipe out any benefit of that extra 0.25%. Also think about the service you receive from the bank or building society, and its reputation for customer service. Some banks have stringent limits on daily withdrawal amounts: if you think it likely that you may have to withdraw £1000, then saving with a bank that will only allow you to withdraw £300 per day will prove very frustrating, time consuming, and costly.
Don’t forget to look at other less obvious banks. Most supermarket chains, for example, have banking in place now as well as other companies that have a large consumer base (such as the AA) and so-called ‘friendly societies’ like the Independent Order of Foresters.
There is a wide choice of savings providers for you to sift through, and many reasons to consider when making your final selection. Interest paid to you might be a main factor, but don’t let it be your only consideration.
Today is a modern world, and life is lived at a pace our grandfathers would have found bemusing, even amusing. For many, a trip to the bank has to be made either during a lunch hour (what is one of those?) or on a Saturday: both times when the bank tends to be understaffed for the excess of customers it receives. If you have the time to spend queuing, or can get to the bank outside its busiest hours, then the personal service you receive may be what you require.
However, nowadays more and more people are electing to conduct their financial business online. You can switch accounts, transfer money in and out, initiate and cancel standing orders, at the touch of a button any time day or night. And online savings accounts often pay a little more interest than in branch accounts.
How you want to communicate with your savings provider is another serious choice to make: do you want the personal service of a face at the counter, or the speed and flexibility of an online facility?
Make that search today, and find the best account for you
Having considered what you require from your savings – instant access or better rates for a fixed term – and how best you want to manage your account – online or in branch – it’s time to search for the best rates and best match to your requirements. There is no time like the present to ensure your cash savings are doing what you want them to, in the right type of account, and with the accessibility you require. And don’t forget to use your tax free Cash ISA allowance, if available.
How would you like a cheque for £6000 ten years from now? Well, that’s a minimum that you could expect if you just saved £50 per month, every month. And that’s not including any interest that might be paid to you.
Saving regularly is a great way of building up a lump sum, either for emergency use or for that special purchase in years to come, perhaps even as a deposit for a home. If you have a lump sum to save, then by depositing into an interest bearing account straight away the whole sum begins to earn interest. But many people, particularly those just starting out at work, don’t have the luxury of having such a lump sum.
Without saving regularly, and building up a pot for emergencies, then any unforeseen expenses have to be catered for by borrowing money. This could come from a credit card, an overdraft facility, a bank loan, or even from friends or relatives. The first three options always cost more than the amount borrowed, and the last can cause embarrassment or aggravation going forward.
Saving regularly, and being disciplined about doing so means that you will always have an emergency fund for the unforeseen. You’ll be surprised how quickly you don’t even miss your regular savings, particularly if transfer funds from your current account to a savings account by a standing order.
Ways of Saving Regularly
There are several ways of saving regularly, including into different types of savings accounts such as instant access (ideal for emergency funds) and notice accounts.
But you could also save into company save as you earn (SAYE) schemes. These generally allow you the option to either buy shares in the company for which you work at the end of a savings term (usually three or five years) and at a pre agreed price, or take the cash including interest. One of the big advantages with SAYE schemes is that the money is deducted at source, meaning you don’t pay tax on it until you take the benefits, and then only if tax is liable. Of course, such saving is not designed to build up an emergency fund, as you can’t reap full benefits until the end of the term and the scheme matures.
For those savers who want to become investors, then drip feeding cash into a pooled investment product such as a unit trust, particularly if invested under a tax efficient Stocks and Shares ISA, not only helps build up a fund that gives potentially greater returns than a building society savings account, but also takes away the effects of daily market swings in share prices.
Investing a lump Sum v Investing Regularly
If you invest £10,000 into an investment trust at a price of £1 per share, and the shares rise to £1.10, you investment would be worth £11,000. However, if the share price falls to 90p, then the investment would only be worth £9,000. In other words, when investing a lump sum, you receive the full benefit of any rise, and take the full hit of any fall in the share price.
Now consider if you had invested only half of the lump sum. With the shares rising to £1.10, the value of your share-holding would be £5,500, and your gross investment pot would be valued at £10,500. If the shares had fallen to 90p, then the gross value of your funds would now be £9,500. By not investing the full amount in one hit, you have protected yourself from the full downside risk.
With the shares of the investment trust at 90p, if you now invest the balance of you funds, and the share price recovers to £1, your fund would be worth £10,555, as against £10,000 in the case of full investment at the outset. This is because the second tranche of £5,000 will have bought more shares at 90p than at £1.
Lump sum investing depends upon market timing, and takes experience to get it right.
Pound Cost Averaging
The method of drip feeding investment cash into the market, and therefore buying shares at different prices is called pound cost averaging.
If you are investing £100 per month into a unit trust, and in the first month the units are 100p, in the second month they are 80p, and the third month they are 90p, you would hold 336 units at an average price of 89.3p. The highs and lows of the share price movement will have been smoothed out, and you will buy more units at lower prices. When the recovery in the share price does arrive, your fund will grow more rapidly.
Start saving as soon as possible
Saving regularly builds discipline of financial habits, and will quickly build up an emergency fund. You can save tax free through Cash ISAs, and the cash will be available to you when you really need it. This in turn will save you interest payments on borrowings.
Over a short period of time, the memory of having the money to spend on a monthly basis quickly fades until you don’t even realise that you are saving. At Christmas you will be able to treat the children, without falling back on your flexible friend, the credit card. You’ll be able to pay your car insurance in a lump sum, and save money by doing so.
Soon you will have built up a lump sum, and be able to consider investing in regular stocks and shares investments (perhaps another ISA for tax efficiency?), and building up funds for your future.
Regular saving is the first method of saving or investing that any individual should consider. It could be the key that unlocks the door to future wealth and financial comfort.
Are Your Savings Protected?
In the UK, all deposits up to a certain level are protected by what is called the Financial Services Compensation Scheme (FSCS). This scheme was set up to protect individuals from the failure of a bank through no fault of their own. There are several things to remember about the scheme:
- To be protected under the scheme, your savings must be with a provider authorised to provide such accounts by the UK’s Financial Services Authority (FSA);
- The scheme pays out to individuals if the bank with which money is deposited can no longer fulfil its financial obligations to you;
- The scheme pays out on a ‘per company’ basis, not a per bank basis;
- The maximum amount covered by the FSCS is £85,000 per individual.
Who is regulated by the FA?
Any bank, building society, or financial institution that carries on investment business in the UK must be authorised by the FSA in order to do so. If the financial institution with which you are saving is not authorised by the FSA, then if it goes bust your money may disappear with it. The onus is on the individual to ensure that he/ she is saving with an FSA authorised and regulated company.
However, if you are saving with a bank in the European Union, you will be covered by the scheme available in that country, but will have to go through the legal process in that country to claim any compensation.
Some offshore accounts are not covered by any compensation scheme. In 2007, many individuals and municipal authorities were lured by the high rates of interest offered by Icesave, the Icelandic bank. Within months the bank had gone bankrupt and investors had lost their money, with no compensation scheme to fall back on.
What does ‘per company’ mean?
Many banks and building societies have the same parent company. For years now, the financial sector has been consolidating and large banks and financial institutions have been merging with smaller concerns. Even large companies have been gobbled up and subsumed within a single entity.
The FSCS will only pay out up to the maximum compensation amount per banking licence. This means that if you hold accounts with, for example, the Halifax, the AA, and BM Savings, you will only be able to claim compensation up to the maximum across all three accounts rather than on each account, as they are all owned and operated under the banking licence of the Bank of Scotland. Always make sure you know who owns the bank or building society with whom you are saving.
How much compensation will I receive if my bank goes bust?
You will receive 100% of your deposited amount, up to £85,000, providing you have invested with an FSA authorised company that is covered by the FSCS. This amount is limited to per individual, and per banking licence. If you have a joint account, then the compensation amount doubles top £170,000.
For those accounts held in European Union countries, the compensation amount is €100,000 per individual.
How can I ensure I receive maximum protection?
- When opening a savings account, you should always consider the following:
- Don’t save more than £85,000 with any single institution;
- Make sure you know who owns the bank/ building society with whom you are saving;
- If you have a particularly large sum to save (perhaps from the sale of a house), consider saving in a joint account (even if the saving is only going to be temporary);
- Take extra care when saving in offshore accounts, and make sure that they are adequately covered by a similar scheme to the FSCS.
Taking proper precautions is just as necessary when saving cash as when investing. Many people believe that cash investments are 100% guaranteed, but this is only part of the story. Know who you are saving with, what compensation is available before depositing your cash, and save accordingly. Be wary of offshore accounts, and take care with onshore savings schemes. Cash deposits are only guaranteed if you take the necessary steps to ensure they are.
Investments are not covered by the FSCS. However, if you have invested, say, in a pooled investment scheme under an investment bond, then there may be recourse for compensation if the product was mis-sold to you. In such a situation there is a complaints procedure that must be followed.