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Savings Guide


Whether you are saving a small regular amount, depositing a lump sum or you require instant access to your savings your personal circumstances will dictate which savings account is best for you. Although we live in a “buy now pay later” society everyone should strive to have savings. Our savings guide will help you choose the right type of savings account.


What are Savings Accounts?


Savings Accounts are a safe and secure way of storing money. Savings products are not the same as investments. Savings accounts are deposit based. You deposit money you don’t need everyday but it can still be accessed with relative ease. Savings accounts do not put your capital (the deposit) at risk.


Whatever money you put into a savings account you will get back, plus the interest. Investments on the other hand offer a potentially higher return but there is an associated risk and you may not get back what you put in.


Why Save?


So all the press coverage is about savers getting a rough deal due to the low interest rates but there are plenty of reasons to have a savings account. There is the feeling of security knowing you have a financial cushion. You never know when that rainy day will come along. You may be saving for a deposit on a house, a new car or putting money away for your children’s education or wedding.


Remember, any individual who pays income tax will have to pay tax on the interest earned on savings. You can however save up to £3600 per year in a Cash Individual Savings Account (ISA) which will not be taxed.

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The Choices


You can access some accounts immediately, others penalise you for taking money if you don’t give the agreed notice, one is tax free, some go up and down with the Bank of England Base Rate and others are fixed at a set level. So you have a lot of choice.


To help you find the right savings account we have listed them below with a brief description and their pluses and minuses. The right account for you will depend on your individual circumstances.


Instant or Easy Access


Instant Access savings accounts can usually be started with just a £1 deposit and as the name suggests you have instant access to your money. Internet Instant Access Savings Accounts often offer the best rates. Instant Access savings account tends to have a variable rate of interest.


Pluses


  • Quick access
  • Variable interest rate which can go up
  • Low minimum deposit (£1)

Minuses


  • Rates can be low
  • Variable interest rate which can go down

Notice Accounts


Notice Accounts usually require you to make a minimum deposit of at least £500 but this does vary and the minimum deposit can be more. Different Notice Accounts have different terms and conditions and vary in length. They can be 30, 60, 90 or 120 days notice. If you withdraw money outside of the agreed terms you will be penalised and will lose some interest. Notice Accounts usually have variable interest rate based on Bank of England Base Rate.


Pluses


  • Better Rate of Interest
  • Variable interest rate which can go up

Minuses


  • Can be inflexible
  • Variable interest rate which can go down
  • Higher minimum deposit (£500+)

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Regular Savings Accounts


A Regular Savings Account requires you to deposit a certain amount each month. This type of Savings Account is good for people who want to save a small amount they can easily afford. A Regular Savings Account can be easy access or notice accounts and may have penalties for withdrawals or missing monthly deposits. It’s a good idea to read the small print on these accounts.


Pluses


  • Reasonable rates
  • Hassle free

Minuses


  • Lack flexibility

Fixed Rate Savings Accounts


Fixed Rate Savings Accounts give the saver a fixed rate of interest for a set period of time. They offer a good rate of interest but in return the saver agrees not to touch the deposit for an agreed period. One, two and three year fixed rate savings accounts are common. No matter what happens with interest rates you are guaranteed to get the stated amount as long as you abide by the terms and conditions of the account. A Fixed Rate Savings Account will require a minimum deposit. The size of the deposit differs from provider to provider.


Pluses


  • Good Interest Rate
  • Guaranteed Return

Minuses


  • Cash is locked away

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Individual Savings Account (ISA)


Individual Savings Account (ISA) is a tax free savings and investment product. It enables a saver to put away a set amount of money each year. Other savings products are subject to tax on the interest earned on the capital/deposit. A basic rate tax payer pays 20% tax, while a higher rate tax payer pays 40%.


There are two types of ISA:


Cash ISA: The cash ISA offers a tax efficient way of saving money. Everybody over 16 is entitled to save up to £3600 in an Individual Savings Account (ISA) each year. Cash ISA’s can have a variable or fixed rate of interest and the can be instant access or notice accounts.


Pluses – Cash ISA


  • Good rate of interest
  • Tax free

Minuses – Cash ISA


  • Limited to £3600 per year

Stocks and Shares ISA: Involves investing money in: unit trusts, shares and bonds, as well as life insurance policies. As with any investment there is a risk that your capital/deposit can be reduced. If you wish to know more about Stocks and Shares ISA’s please contact a Financial Planning Consultant who is qualified to advise.


Children’s Accounts


Children’s Accounts can be easy access, notice, bond or term account. The aim of a children’s savings account is to encourage young people to save. The provider may offer free gifts as an incentive to open the account but there can also be restrictions, such as notice periods, limited withdrawals and a maximum deposit.


Child Trust Fund


This Government initiative offers tax free savings and investments for children born after September 2002. The Government sends a £250 voucher to help start them off saving and then another £250 when they are 7 years old. Family and friends can invest up to £1,200 per year. The child is not able to access the money until they are 18 years old. The fund can be based on a cash-based account, stocks and shares or a stakeholder.

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Other things to consider when choosing a Savings Account


Internet: If you have access to the internet you can often get a better rate.


Restrictions: Beware the terms and condition. Always read the small print.


Bonuses: Some savings account offer a high rate of interest initially but a certain element of the rate is a bonus and only applies for a limited time.


Loyalty: This can be fatal. You may need to move your savings every 12 months to ensure you are getting the best rate of interest.


Protection: Consumers are protected by the Banking Code and the Financial Services Authority. You can find out more about the Banking Code at the British Banker’s Association website www.bba.org.uk and the Financial Services Authority website www.fsa.gov.uk


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