TheRateTart Savings Guide
Contents
- Introduction
- What are the different types of savings account?
- How do I get in get in the savings habit?
- Tips from TheRateTart
A savings account guarantees your initial investment and pays you interest at a rate you can see before you take the plunge.
An ISA provides you with a way to shelter some of your savings from tax. Its is a "wrapper" for an investment, be it cash or shares, that means that it attracts less tax. Some of these investments, like an Index Tracking ISA that follows a stock market index, can go up as well as down. Some, such as a Cash ISA may guarantee your initial investment.
The savings market is awash with different types of account for different types of savers. TheRateTart guide to savings will help you to tell your instant access from your ISAs and help identify the best deal for your saving goals.
What are the different types of savings account?
There are seven main types of savings account. Not all of them will be suitable for your needs, but you may find there are benefits to having more than one type of account for different objectives.
Instant Access / No Notice Accounts can be opened with minimal funds (as low as £1). You can pay into them as often as you like and there are no penalties for withdrawals. Flexibility comes with trade-offs. Interest rates are usually lower than other types of account or come with strings attached (e.g. high rate only lasts for a limited period, penalties for making withdrawals etc). These accounts usually track the Bank of England base rate; great if it goes up, not so if it goes down. You can sign up for email alerts on interest rate changes at the Bank Of England site. Most banks will change their interest rates within a month of a base rate change, so these alerts should prompt you to pay TheRateTart a visit to find out about the latest and greatest saving rates.
Notice Accounts apply a penalty when a withdrawal is made outside the agreed notice period. Periods range from 7 to 120 days, but the most common is 60 or 90. Penalties typically consist of loss of interest on the amount withdrawn for the agreed notice period. For example if you made a no notice withdrawal of £100 from a 60 day notice account, you would lose interest equivalent to 60 days on that £100. These accounts usually need a bit more money (a few hundred pounds) to open. The main advantage is a better rate of interest than Easy Access accounts. The penalties can also be a good brake on the urge to splurge. Interest rates follow the Bank of England base rate, so don't forget to make use of the email alerts at the Bank Of England site to stay ahead of the pack.
Bond or Term Accounts require a commitment to leave your money untouched for the length of the agreed term (usually 1 to 5 years). You will need a bit of a nest egg to open one as the minimum investment is usually £1000. It pays to invest as much as possible up front as often no further deposits will be allowed during the life of the bond. Be aware that the interest rate may be fixed at the start of the bond. Effectively you are betting that the base rate does not increase to your disadvantage during the period your money is tied up. The main benefit is that generally bond or terms accounts offer the best interest rates on the market. Plus they are predictable. As the interest rate is fixed you know exactly what your payback will be.
Regular savings accounts are accounts that require you to save, er, regularly. They encompass easy access and notice accounts, but tend to have restrictions around use. For example, a limited number of withdrawals allowed, upper and lower limits on the monthly deposit allowed, penalties for missing monthly deposits and other canny ways of clawing back interest paid. Regular Savings Accounts often come with eye-catching rates of interest. However even these need to be treated with caution. Bonus rates may be for a limited period, after which money may be transferred into an account with a far less competitive rate. These accounts track the Bank of England base rate be sure to use the email alerts at the Bank Of England site to stay ahead of the pack.
Internet Savings Account can only be opened and managed via the internet. There are a variety of internet savings accounts, covering easy access, notice, bonds and ISAs. Because these accounts cost the banks less to operate the rates of interest on offer are frequently superior to the rates for equivalent types of offline accounts.
Online Account Security is a cause of concern for many customers. On the other hand this is a much bigger concern for the banks themselves. There are two reasons for this;
- The bank rather than the customer is responsible for losses due to security failures that are caused by short-comings of the online banking hardware or software. The customer is responsible for taking common sense precautions to prevent their account from being accessed illegally. For example, never reveal your ID or password to anyone, don't walk away from your pc whilst logged in etc.
- For many banks the online channel is an increasing source of business. Serious breaches in security damage reputations which in turn hits business. This means they have a strong incentive to keep their systems as secure as possible.
Children's savings accounts don't always offer the best rates and require at least some intervention from parents to manage, so why open one? If your aim is to teach your children the importance and value of saving, a dedicated children's account can be a good way to go. Have a definite goal to save towards as accumulating money for the sake of it is unlikely to maintain motivation for long. Remember that the main reason banks run these accounts is to tie your children into their brand early. So make sure you also introduce them to the benefits of being a rate tart and switch accounts on a regular basis to get the best deals.
If your goal is longer term (school fees, university fees, or even kick starting their pension), then a more formal investment vehicle is more suitable. To identify what options are available, the best bet is to consult an Independent Financial Advisor – find one close to you by clicking on www.unbiased.co.uk.
Child Trust Funds were introduced by the Government to offer tax free savings and investments for children born after September 2002 who are eligible for child benefit. The government kick starts the fund with an initial £250 voucher at birth and another at age 7. Friends and relatives can then invest up to £1200 a year until the child reaches 18 when the policy matures. Bear in mind is that once matured the funds legally belong to the child, not the parents...so there's a possibility that the funds could quickly be re-invested in a trip to Ibiza for them and their mates.
Individual Savings Accounts are tax free savings wrappers whereby individuals can save up to £7000 a year without having to pay part of the interest to the tax man. For a higher rate tax payer that is an extra 40% of interest. The government has recently guaranteed this tax break will be made permanent. There are two main types of ISA;
- Cash: Usually taken out through banks or building societies. These are a good option if you want a combination of low risk and easy access. Guaranteed to pay out the sum invested over the term plus interest, all with no tax to pay.
- Stocks & Shares: These can involve a range of investment vehicles such as investment funds; unit trusts, shares etc. Although the potential rewards are greater than those available with a cash ISA, as with any investment there is a risk of under-performance. This could mean mean making less money than you hoped or even losing some or all of your capital.
To open a Cash ISA you need to be 16 years old or over. For Stocks and Shares ISAs the age limit increases to 18. In both instances the account holder must be a UK resident for tax purposes. As the ISA year runs in line with the tax year (starting on 6th April) new products tend to be launched in March & April, so be sure to check out TheRateTart for a great selection of deals next ISA season.
How do I get in get in the savings habit?
Like any good habit saving money can be hard to maintain. The benefits (more money and security) are not immediate, whilst the disadvantages (not buying that CD right now) are. To avoid falling off the wagon set up a direct debit to pay a regular amount into your savings account. That way you won't be, erm, 'distracted' on the way to the bank with your cheque. It can also minimise the sense of sacrifice as the process requires no ongoing effort on your part.
Tips from TheRateTart
This is not an exhaustive list, but here are some tips from TheRateTart to bear in mind when opening a savings account.
Introductory Bonus Rates – Term specified. Once the 'honeymoon period' is over, funds are typically swept into an account paying a far less competitive rate. Again, the banks are counting on customers either not noticing this or never getting around to switching to a better rate. To receive a free email alert when it is 'Time to Tart register with TheRateTart. You can add any existing savings accounts or other products to your profile and set an alert for the date of your choice (i.e. If the savings account has a 6 month introductory deal be alerted in 5 months) . And as a registered user we will store details of any products applied for through TheRateTart to make setting up alerts even easier. You can edit or remove these later if you wish.
Introductory Bonus Rates – No term specified. Some accounts with market leading rates do not commit to a specific period for maintaining this rate. Once the target number of customers has been reached the account is closed to new customers. Gradually interest is reduced to a far less competitive rate – the banks are counting on customers either not noticing this or never getting around to switching to a better rate. To receive a free email alert when it is 'Time to Tart register with TheRateTart. You can add any existing savings accounts or other products to your profile and set an alert for the date of your choice (i.e. If the savings account has a 6 month introductory deal be alerted in 5 months) . And as a registered user we will store details of any products applied for through TheRateTart to make setting up alerts even easier. You can edit or remove these later if you wish.
Terms, Conditions & Small Print. Many savings accounts have restrictive terms and conditions that require the account to be carefully managed to get full benefit. Examples include restrictions on the number of withdrawals allowed, interest penalties in any month a withdrawal is made, minimum or maximum monthly amounts (with reduced interest if the minimum is not saved) and other cunning shenanigans.
Linked Current Accounts. Lure you with attractive interest rates but stipulate that you must have (or transfer to) a current account with the provider into which your monthly salary is paid. This is not because current accounts are hugely profitable. They are not – many are loss making. What they do do is offer the bank a unique insight into your financial profile. Now with the inside view they can more effectively target you for sales of other, more profitable products. Don't be surprised if the savings account takes a sudden nose dive before very long either.
This account tracks the base rate – eventually. If you have a mortgage you will have noticed how quickly mortgage interest rates get increased when base rates go up. Savings rates are often not quite so quick to follow suit. Chasing the most generous offer after each base rate change probably is too much hassle. But it pays to keep an eye on trends. If your bank or building society is developing a mean streak it may be time to pay TheRateTart a visit. To receive a free email alert when it is 'Time to Tart register with TheRateTart. You can add any existing savings accounts or other products to your profile and set an alert for the date of your choice (i.e. If the savings account has a 6 month introductory deal be alerted in 5 months) . And as a registered user we will store details of any products applied for through TheRateTart to make setting up alerts even easier. You can edit or remove these later if you wish.
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