When we have worked for much of our adult lives and invested the fruits of those labours in caring for our children and ensuring their smooth transition into independent living we find ourselves able to invest some of our surplus income in providing savings for our future. Naturally, we want the best return on our investments. As this brief article will exhibit, the issue of cash savings accounts and which one to choose is far from straightforward, particularly during periods of economic downturn where the financial institutions are reluctant to offer anything other that parsimonious rates of interest. The first account that we will look at is the current account.
The Current Account
For reasons that will become clear, the current bank account is not one in which it is not always wise to invest your savings.
There are many current accounts that offer 0% interest on monies invested, regardless of the amount in the account. Obviously, being a current account you have unfettered access to your money and all the facilities that come with a current account, such as a cheque book and debit card but a combination of the low (or even non-existent) interest rates available and the fact that your bank is likely to have other savings options that are more beneficial and only marginally less flexible means that you should hesitate before leaving anything other than the bare minimum in a current account.
That means you should keep enough to service your monthly needs and ensure that any surplus is paid into a more efficacious savings account.
The next account we will look at is only slightly less flexible than a current account but it is almost certain to provide a greater return on your savings. This is the Easy Access Account.
The Easy Access Account
As its name implies, the easy access account offers a straightforward way of accessing your funds as and when you require them. However, there is likely to be a limit on the amount of money that can be withdrawn at any one time. Because the savings institution does not have the advantage of knowing that it will be holding the saver’s money for an extended period of time, as it does with some of the other accounts that we will examine later, the interest rates offered on easy access accounts are likely to be relatively low.
However, savers are likely to find that the easy access accounts that provide the most attractive interest rates are those that do not require an office or branch based organisation of the account. Accounts that can be run by telephone or, even more likely to attract generous interest rates, through the internet, cost the savings institutions less to administer and consequently they are willing to provide higher interest returns on savings.
Even with that advantage, however, it remains the case that Easy Access accounts are amongst the most unprofitable of savings products presently on the market. For accounts that provide a greater return the savings institutions want some guarantee about the amount and/or the length of the investment.
There are several types of accounts that savings institutions offer which provide higher interest returns on savings. These tend to be based upon the saver investing a fixed sum for a set period of time, on a fixed interest period subject to conditions or upon the saver investing a minimum regular amount into the account. The first of these that we will consider comes within the latter category and is most frequently described as a Regular Saver Account.
The Regular Saver Account
In simple terms, the Regular saver account is one into which the saver agrees to invest cash into the account on a periodic basis (conventionally this is monthly). Because the savings institution can rely upon receipt of cash on such a regular
However, savers are likely to find that the easy access accounts that provide the most attractive interest rates are those that do not require an office or branch based organisation of the account. Accounts that can be run by telephone or, even more likely to Regular Saver Account rewards investors who are prepared to pay an amount of money on a periodic basis (usually one month) into their savings account. Because the savings institution is able to operate on the basis that a fixed sum will be received it can provide what are, on occasion, some extremely attractive interest rates. However, there are certain conditions that apply to these accounts. Firstly, because the interest rates offered can be so attractive, there will be an upper limit on the amount that can be invested. If that upper limit is breached, it is likely that there will be interest penalties imposed, resulting in a much reduced interest return.
Equally, it is likely that there will be a limit on the number of withdrawals that the saver is permitted to make in a year. Once again, transgression against that condition is likely to result in penalties against the saver’s interest return. Nevertheless, for savers making only relatively small investments, who are able to see their cash tied up for a period, the Easy Saver can be a profitable option. The next type of savings account that we will consider is one where the rate of interest is higher than the standard current account or easy access account but where there are additional conditions affecting your access to your money. This is the Notice Account.
The Notice Account
In basic terms, the notice savings account is one where the saving institution offers a higher rate of interest in return for a condition on the account that requires the saver to give a minimum period of notice before making any withdrawal from the account.
The notice account is not appropriate if there is a possibility that you will require all or part of the funds urgently, or at least within the notice period applicable to the account. However, if you are able to have your cash tied up for the minimum notice period you can benefit from some enhanced interest rates.
It should be said that savers can still obtain access to their funds within the notice period if they urgently require them. However, in such circumstances the saving institution is likely to levy some quite Draconian charges.
There is a further variation on the type of account where the saver may have to commit to keeping his cash in the account. Other such accounts do not place such stringent requirements. The type of account that we will now consider is the Fixed Rate Savings Account.
The Fixed Rate Account
With a fixed rate savings account, the savings institution offers the saver a rate on his savings that will be fixed for a given period. This type of account is particularly useful when interests rates are likely to fall. Conversely, if interests rates rise, the account may well result in less of a profit that a variable rate savings account, such as a notice account, particularly if there are prohibitions against withdrawal for the account. Some advantageous interests rates can be found with these accounts, particularly those requiring that the funds remain in the account. Larger investments usually receive higher interest rates and the maximum investment can be relatively large. Interest can be taken monthly and this is not counted as a withdrawal from the account.
The interest is normally paid through a bank transfer to the savers current account either with the same savings institution or by direct debit to an outside account.
If you are able to invest a large sum into a savings account and are confident that interest rates are not likely to rise a fixed rate savings account would be appropriate for you, especially if it had no penalties against withdrawal in the event that interest rates were to take you by surprise.
We will now look at another means of saving, which can be either at a variable interest rate or a fixed term but which provides the extremely useful benefit of producing a tax free return. This is the ISA, or Individual Savings Account.
The Cash ISA
An individual savings account, The Cash ISA allows savers to pay a certain amount in each tax year, the interest upon which will not attract any UK tax. Although the interest rats are not likely to be as high as notice accounts or fixed rate accounts or fixed rate bonds, which we will discuss below, the fact that the rates are both gross and net on income tax boosts them by 20% for the basic rate taxpayer and by 40% or 50% for the higher rate taxpayer.
Cash ISAs are therefore extremely beneficial to those with significant income and of some use to those on basic rate tax. For those with only a modest income, it is worth shopping around to ascertain whether a better return, even if this is taxable, could be obtained through a regular saver account, for example. It is likely that the saver will be able to invest more in a regular saver account in a year than into an ISA, the limit upon which is presently £5,100.
As mentioned above, ISAs can attract either fixed rate or variable rate interest.
It should also be stated that Equity ISAs are also available but these go beyond the scope of this article and will feature elsewhere at some stage.
There is one product in the cash savings marketplace that is likely to offer the highest return on your investment. It can mean that your money is tied up for lengthy periods. It may even mean that you have no access to your interest other than on an annual basis but it remains a useful savings account for many savers. It is the fixed rate bond.
Fixed Rate Bonds A fixed rate bond has many similarities with a fixed rate savings account but there are certain significant differences. Firstly, the term of a fixed rate bond can be significantly longer than for a fixed rate savings account. Many savings institutions offer bonds ranging from around twelve months right up to five years. The returns that are offered on the lengthier bonds are higher than for the shorter term bonds. The interest rates offered are frequently tiered, according to the amount of the investment and there is often a complete prohibition on either adding to or subtracting from the bond during the term. If there is not a total prohibition on withdrawing capital there is likely to be a very severe penalty in terms of days of interest loss.
Certain bonds provide for the payment of interest on an annual basis whereas some pay interest only at then end of the term. There are some that provide interest on a monthly basis but this normally involves a modest reduction in the interest rate on offer.
Savers should be wary of entering into lengthy bonds if they may need to withdraw their funds or if interest rates look set to rise during the lifetime of the bond. Otherwise, they represent a certain income on savings for the future that is not dependent upon the vagaries of interest rate fluctuations.
ConclusionThe credit crunch an the ensuing recession has meant that savers have been squeezed to the extent that certain accounts now produce little if any return on cash savings. At the same time, inflation is running higher than their investments can keep abreast with, resulting in an overall deficit. However, it still pays to shop around, which includes leaving your existing savings institution to find the best deal available to you. Check the comparison sites for the best savings rates that you can obtain. Bear in mind particularly that if a new savings institution is offering you a better return than your existing one you owe no debt of loyalty.
Take the best deal that you can find according to your own particular circumstances and always consider obtaining independent professional advice before making any investment, particularly a substantial one.
And always remember that the maximum protection that you are likely to receive for your savings is £50,000 per savings institution that you are investing with. Although higher rates are offered for substantial investment, it may give you peace of mind to play safe and keep your savings with each individual institution within that limit.