Types of Savings Account in the UK and Which Best Suits You

When preparing and planning for your personal financial plan, it is wise to consider the different ways and type of savings accounts. In order to make knowledgeable choice on where to save your money. Savings accounts need to be scrutinized to ensure a benefit in the short run and the long run. Enlighten yourself on the different types of savings accounts that are available. If you want to build up a decent savings portfolio, you can't afford to ignore the different savings options available.

There are different types of savings account in the UK. Hence the uncertainty on which one is right for specific situations and usage. Let’s talk about the accounts and investments opportunities available, and how they work, so as to help you make the right decision. Many different types of accounts swamp the market making it difficult to decide that which suits you ideally.

Several factors affect the kind of savings account that suits you, including how long you are willing to lock and save your money, your likelihood of having access to the money at a given moment and whether or not you the interest is taxable. Below are the various saving options available their purpose and risk associated with each

1) Regular Savings Account

With a regular savings account, you commit to deposit money each month, without fail. You pay monthly deposits. In return, your money earns a higher interest rate than what you’d get with a current account or ordinary savings account. It’s best suitable for savers who are starting out and wish to find a disciplined way to save. It’s also advisable to go for it if you are not looking forward to invest a large lump sum. The interest rate for this type of account varies and depends on different financial institutions’. It might be either fixed interest rate or one that is variable. Check the rates before opening the regular savings account. On whether the interest rate is fixed or variable.

The account might only last for a fixed term. At the end of the term you get your money plus the interest accrued. For Spend thrifts automatic savings plans can be the perfect option for developing a saving culture it’s offered by many banks to help customers save. The customer issues a standing order to the bank, to automatically transfer a specific amount of money from your current salary account into your savings account monthly. Most individuals with automatic savings enjoy seeing their savings grow monthly while earning interest.

The regular savings account has a shortcoming in that it limits on the number of withdrawals each year. Don't go for this type of account if you are saving for emergency purposes. Read the rules carefully before choosing a regular savings account .It is also likely that a regular savings account has a limit on the maximum allowable savings each month. Hence preventing saving additional cash that you could be willing to save. Failure to remit the monthly savings may see your interest rate reduced or accrue charges on withdrawal. Charges may accrue on premature withdrawal. Up to £1,000 interest on the savings is tax allowable. However For higher tax payers earning above £150,000 a year their interest is tax allowed up to £500.

Easy/Instant access savings accounts

These are accounts that allow you to withdraw your money whenever you need it and also earn interest. They offer a better return than the current account. Although the rate is much lower compared to the regular savings account. You get to save as little or as much as you want each month. Some have debit cards to allow ATM withdrawal while others only allow over-the–counter withdrawals. Emergency savings are best kept in an instant access savings account. It’s free to open an easy access account.

In the long run the easy access savings may not hold their real intrinsic value if cost of living or inflation surpasses the interest rate offered. The tax charges on interest earned is similar to that of regular savings account.

Notice accounts

Regular savings earn a better rate of interest if you agree to lock them away for some time. The demerit is that you cannot access your money instantly. The notice savings accounts compared to easy-access is different in that you inform your provider in advance of your intended withdrawal and you only get access to your cash after giving the notice and the period lapses. The notice period may vary 30, 60 or 90 days ahead. The interest rates offered are better compared to instant access. Notice accounts in most cases earn a higher rate compared to Instant access. It’s wise to compare notice savings rate and that of instant access.

An emergency withdrawal from a notice savings account is likely to lead to interest loss. The interest rate is likely to be variable. Hence the needs to check the savings earned and switch accounts if there is a better deal available.

Cash Individual Savings Accounts (Cash Isas)

A saving account that allows a maximum amount to save either in shares, money or combination at tax free rate on the interest earned.

On exceeding your personal savings allowance you are entitled to pay interest on your savings in line with your usual tax rate. Hence chances are that you lose some of the earnings. Since April 2016 Cash Individual Savings Accounts (Isas) provide a tax-free interest. However there are limits on how much you can deposit each tax year. Currently set at £15,240.The savings can be made up of, shares and cash or a combination. Past the limit set you are mandated to look for another saving option. Cash Isas do not offer the highest rates in the savings account market but after tax you the best ones are easily outdone by cash ISAS. Compare cash Isa rate with the net rate for regular savings account. Only one Cash ISA account is allowed per year

The various types of CashIsas

Basic Isa

The classic Isa is a tax-free return. You can choose to pick cash, stocks and shares or a combination of both.

To own one; for a shares Isa one You must be a UK resident aged 18 or over  and at least 16 years for a cash Isa.

Isa allowance for each year its £15,240 for each person .For April 2017 to 2018 financial year, it will be £20,000.

Basic cash Isa is suitable for everyone. To enjoy high returns Switch providers regularly. If you need to invest or a longer period of five years or more consider a stocks and shares Isa.

Inheritance ISA

For people who have lost their loved ones and spouses. Opened by widows, widowers and civil partners. An extra Isa allowance is added on top of the usual £15,240. You get to put all the cash under your name, all interests and withdrawals at a tax free rate. People whose spouse had an Isa when he or she died are advised to take on this Inherited Isa

LIFETIME ISA

Available from April this year for those under the age bracket of 18 to 39. Get a 25 per cent bonus from the Government if you save up to £4,000 a year. The money can be used to buy a hose of up to £450,000.Or you can save it in until you are 60. You lose the Government top-ups and interest on money withdrawn earlier for other reasons rather than a house deposit.           A charge of 5 % s also applicable on withdraws. It suits the Younger, taxpayers on basic rates who want a home and employees without a pension scheme.

HELP TO BUY ISA

First-time home buyers benefit from this savings deal. You save up to £12,000 and 25 per cent bonus on your savings. You can start with a lump sum of £1000 then add £200 deposits each month. If the ash is used for other purpose you lose the deposit. Home buyers are best suited for this type of Isa.To apply you must be over 16 years and never owned a home before.

INNOVATIVE FINANCE ISA

The Innovative Finance Isa lets you put your savings with at par lenders they are riskier since your money isn’t covered by the Financial Services Compensation Scheme if the borrower defaults .Useful if you are looking to get a better return. Invest only a small portion of your savings.

FLEXIBLE ISA

This is another basic Isa .Allows you to put in your whole £15,240 allowance, withdraw and deposit it again without losing –tax allowance.

Some providers don’t offer this so check to see whether they offer this before you save.Ideal if you want full access to your money.

National Savings accounts

National savings is a government run department that offers saving and investment products (bonds) to the public. It’s a safe place for your money since you’re lending to the government. All products are capital secured and your money is guaranteed no matter the circumstances or happenings.

National Savings products change frequently the bonds returns are paid after a tax charge of 20% is deducted.

.Returns on savings are mostly free of all tax, but savers have to put it on their tax return.if inflation is high than the returns your money might not hold its true value. Accessibility to your money varies depending on type of account. Bonds and certificates issued can be cashed in before maturity but at a penalty that relates to the number of years or time remaining before maturity.

Index-linked savings accounts

These are fixed-term deposits. You leave your money in the account for a fixed number of years. In exchange, for an interest rate that co relates to the inflation. It is appropriate if you want the value of your wealth and cash to keep up with inflation. You have a considerable amount of money that you can devote for a fixed period of time. If you want to avoid losing capital it comes in handy. With a low inflation base rates currently at 0.5% it is highly unlikely to find many providers offering these Index-linked savings accounts .At the end of the fixed tem you earn all your money plus interest accrued. During high rates of inflation the rates offered are high and tour savings don’t lose value. However you need to pay tax on the interest earned hence nay fail to keep up with inflation.

Index-linked savings accounts run for a fixed term. Access to your money is limited hence ensure you know before you commit. Penalty is charged for premature withdrawal of funds,

Child Trust Funds

Introduced in 2002 to motivate people to save for their children. Though they are being replaced by Junior ISAs. They are tax free children savings accounts to ensure children grow into adulthood with a savings account in hand.

However this fund has stopped but existing Child Trust Fund accounts can continue until the child is 18 Junior ISAs are not available for children who qualified for a Child Trust Fund 

Fixed-rate bonds

Fixed-rate bonds guarantee a fixed interest rate on your cash over a specified term. The rates are higher compared to instant access, regular savings or notice accounts. Access to your money is limited for the fixed term.

Fixed-rate bonds vary according to the number of years, the longer the period the higher the returns.

A hefty interest penalty is paid if you withdraw prematurely probably due to emergency cases for doing so. Therefore, tying up your cash in a fixed-rate bond is advisable if you have excess to spare for a long period.

Investing in a fixed-rate bond is a sure way to protect your money from inflation but if you take a fixed-rate bond just before rates rise, you chances of benefiting from the rise are slim.

The deposit required for many fixed-rate bonds is huge -so for beginner savers it’s not appropriate. In addition, some fixed-rate bonds allow you to invest only after you open a current account.

Premium Bonds.

Premium Bonds from National Savings and Investments provide give you the chance to win tax-free cash prizes. They don’t pay interest, but provide a chance to win cash from £25 and £1 million monthly. Premium Bonds are appealing if 

Want to stand the chance to win tax-free cash prizes in a monthly draw and have extra cash to invest. However premium bonds don’t provide a regular income or guaranteed earnings. Chances of your money being eroded by inflation exist if you save via premium bonds.

Money Market Accounts

It is a financial account that pays interest on the basis of current interest rates prevailing in the money markets.

This type of investments typically puts its money in low risk areas such as treasury bills and commercial papers. They have very short maturities; hence a safe haven when there is extreme volatility. Money market accounts are high liquid compared to stocks and bonds. They tend to invest in securities that are of high demand.

Money market deposit accounts require balance of £100 to £2,500 hence the interest is significantly higher compared to regular savings accounts. The money markets accounts don’t have a limit on h withdrawals.

Certificates of Deposit (CDs)

A certificate of deposit (CD) is a savings certificate allocated a specified maturity date, a type of promissory note issued by the bank with a fixed interest rate. It is a time deposit, similar to a savings accounts that is insured hence risk free. Also exist as savings certificates allowing you to receive interest periodically. An investor purchases it from the bank directly.

CDs operate on the theory that individuals forfeits cash at hand or liquidity for a higher return in the long run. CDs have higher interest rates when compared to short-term CDs.
since there is more risk involved with holding the investment for a longer period of time and since the individual foregoes liquidity he is compensated with a higher return for a longer period.

Their maturity date ranges from just one month to five years. Longer periods usually pay the highest interest rates. There are restrictions on when you are able to withdraw. Withdrawing maturity, you leads to a penalty charge.CDS vary according to the amount ranging from small cds to large CDS of more than £100,000.

Stocks

Shares. For shares you invest in individual organizations and companies. If the price of the share you have invested in goes up so does your savings and investment the vice versa. Is also true. One can earn an income in the form of a dividend from the shares profits

But investing in shares and expecting a good return is for the long term not the short term. You can invest in shares and build up lots of money to pay your children’s education, to save for your retirement or to save to buy a home or for a home improvement without having to borrow from financial institutions at high interest rates. Research shows that in the long run shares beat cash since they account for inflation.

The basic rule is that for money that you need in the short term future one should stick to savings accounts. Such as tax-free cash Isas. 

What should I invest in? 

Investing in single company shares is risky. The better option is to use an investment fund. That combines money from many people intending to invest and buy lots of different shares, hence diluting the risk. Funds are diverse with some investing in international companies while others focus in the UK or focusing on one industry or sector.

How much can one make with Shares? 

In shares investments there are no guarantees .The performance depends on the companies invested in and the ability to make wise informed decisions when buying the shares. The higher the risk the higher the returns not forgetting the risk of losing huge amounts of money. Most investors tend to be somewhere in the middle avoiding too much risk while taking some. Building a stable portfolio may take years. The longer you are putting your money the higher the risk.

For beginners the best option is to save through a cash Isa. You hold your investments. In here, tax free is guaranteed on the gains. Regular investing, rather than paying huge lump sum, is ideal, in times of volatility, as they are now. Experts fail to precisely choose the right time to buy. Regular saving allows you to gain from the peaks and downs of the market. 

What Savings option to choose 

This will depend on the risk you can handle. Whether you are a first time beginner or one who has progressed in terms of savings. Out of the savings options identified each has its own merits and demerits and it’s upon the individual to make an informed choice on consultation with relevant personnel. Some of the key Factors that have been identified include, the time you are willing to wait for the funds to mature. Tax incentives offered are also a major determinant. Purpose of the savings, amount being targeted among the other various factors