Building up your piggy bank.
What’s it all about?
Savings are about putting money aside.
Why should you care?
Savings are generally the lowest risk option for putting your money away and often give you quick access to your cash when you need it.
Saving differs from investing, which is a long-term approach where you trade off higher risks in exchange for the promise of higher returns.
Knowing how and where to put your savings will help you make the most of your money.
What will you learn?
In this pack, you’ll learn about different savings options, how they work, and what to consider if you want to get in on the action.
What are savings accounts?
Savings products allow you to put money aside using a bank or official scheme.
There are five types of saving products which you can choose between, depending on your financial goals. They are:
How do savings accounts work?
As a child, you might have had a piggy bank or a jar where you saved your pocket money. Opening a savings account and making deposits is similar but you earn a small amount of interest on your balance. The interest you receive will vary depending on which savings account you open. Below we’ll discuss the different types of savings and what you need to know about each one.
What to consider when choosing a savings account
Easy access savings accounts
These are simple bank accounts, also known as instant access savings accounts. You can deposit as much cash when you like and withdraw it whenever you want, without having to pay any fees or charges. You can usually start saving with as little as £1.
Easy access accounts are good if you want quick access to your money with no fees. Since you can withdraw your money at any time, they’re great for emergency funds.
They aren’t great for interest rates, which are often lower than the rate of inflation. This means your money will buy you less than it would when you put it in the savings account, because prices have gone up than your money has.
Regular saver accounts
With a regular savings account, you deposit a minimum amount each month. In return, you get a higher interest rate than with an easy access savings account. How much you put in varies from bank to bank, but you usually must deposit between £25 and £500 a month. You’ll also have to commit to making these regular payments over an agreed period, typically 12 months
Regular saver account rates can be higher than the rate of inflation, which is excellent for growing your money. The discipline of putting away a certain amount each month can also help build up your savings reasonably quickly.
The downside is that they have strict terms and conditions, sometimes including restrictions on withdrawals and penalties for missed deposits.
Notice savings accounts
As the name suggests, these accounts require you to give advance notice if you want to make a withdrawal, usually between 3 and 120 days, depending on the account. In return for having your money locked away, notice accounts typically earn higher interest rates than easy access accounts.
These rates are still usually lower than other types of savings accounts. The more notice you’re required to give, the higher you can probably expect the interest rate to be. Beyond this, notice savings accounts are like easy access accounts because they allow you to save at your own pace.
Notice accounts are useful if you’re saving up for a specific goal – such as a new car or a holiday – but want to keep control over how much you save each month.
Individual savings accounts (ISAs) work in much the same way as any other savings account, except that any interest you earn is tax free.
You’ll find a range of interest rates on offer and the longer you ‘lock away’ your money, the better the rates. Interest rates are usually higher than other types of savings accounts, apart from regular savings accounts.
With a fixed-rate bond you deposit a single lump sum for a set period – from six months up to five years or even more. During the term you won’t be able to access your money, but you will receive a fixed rate of interest every year you have the bond.
You usually have to put in at least £1,000 and you can’t make additional contributions or withdrawals during the agreed term.
As with other savings options, the longer you tie your money up for, the higher the interest rate. Some banks also offer tiered interest rates, which means the rate goes up if you deposit more money.
Fixed-rate bonds are great if you want to know from the outset exactly how much money you will earn. There’s a risk that interest rates will go up higher than the interest rate fixed to your bonds.
Overall, you should think about building up your savings in easily accessible (liquid) forms before you put them into products that ‘lock’ away money. As a general rule, you should have at least 3 to 6 month’s worth of living expenses that you can get hold of in an emergency. Once you have that, you can start looking at locking money away.
Beyond this, whether you save or invest depends on your circumstances and financial goals. In the long term, investing (such as in stocks and shares ISAs, or property) usually outperforms savings, but this can never be guaranteed. But investing comes with risks, and you could end up with less than you started with. If you can’t afford, or don’t want, to take any risk with your cash, then saving is for you.
You should also remember that for anything other than earnings from your cash ISA you may have to pay tax on the interest earned on your savings.
Financial Services Compensation Scheme protects customers when authorised financial services firms fail. You could be entitled to compensation of up to £85,000 with most savings accounts.
Where to get an ethical savings account
An increasing number of banks and building societies offer ethical savings accounts, including ethical ISA options.
They promise to use your money to finance organisations that make a positive impact on social, cultural or environmental issues. In contrast, they don’t use your money to support industries like arms, fossil fuels or tobacco. Unfortunately, many lenders don’t publish a full list of their clients and there is very little standardisation for ethical considerations, so it can be quite a grey area.
The key takeaways from this pack are: