Andrew Hagger, of comparison site Moneynet.co.uk talks about the importance of choosing the right savings account.
Picking the right savings account for your needs can seem problematic. There’s a vast array of on offer from different banks and building societies, and many have a mind boggling list of terms and conditions attached.
Where to start The best place to start is by understanding the ideal savings scenario, and then you can gradually try to work towards this. For starters, it’s important to have some of your cash in an easy access account for emergencies. You also should look to take advantage of your annual tax free individual savings account (ISA) allowance, so it may be that you initially keep your emergency fund in an instant access ISA and kill two birds with one stone.
Longer-term savings Once you’ve got a reasonable sum in your easy access account it’s time to look at longer term savings with fixed-rate bonds. Unfortunately, some people assume a fixed rate bond is some sort of complex equity-based investment as opposed to a simple savings account. Because you don’t have access to your cash for the term of the bond (anything from 6 months to 5 years) the provider may compensate you with a higher rate of interest than you’d receive on an easy access savings account.
So the ideal situation is to have three types of account in your savings portfolio: an emergency fund of around three months’ salary in an easy access account, some tax efficient savings in a variable or fixed-rate ISA, and finally some longer term savings tied up for a fixed period – and ideally earning a higher rate of interest.
Regular savings If you’re starting to save for the first time, whether it’s for something specific or to get into the savings habit, it’s important to slot away spare cash on a regular basis. If you set up a standing order to transfer money to your account every week or month as soon as you get paid, it gives you the discipline to save regularly and removes the temptation to fritter your cash away.
There are a couple of options for your regular savings: an instant access cash ISA with would normally be your first choice. However, in the current environment you can get an almost identical return (after tax) with standard internet savings account. Check out comparison sites for some of the best rates.
While you can obtain a far higher rate with Regular Saver accounts which are offered by a handful of providers, bear in mind that they come with some pretty strict terms and conditions. So don’t opt for this type of account unless you’re absolutely sure you can stick to the rules for the full duration.
Fixing your rate If you’ve already accumulated a reasonable savings pot and you’re now looking to put some of this into a fixed-rate bond, you’re faced with various options. Interest rates on some fixed-rate bonds have picked up nicely since the low point earlier this year, but the biggest decision for most people is how long to invest their money for. The longer you fix, the higher the rate – but consider carefully if you’ll need access to your cash during this period.
With the Bank of England base rate still languishing at a record low of 0.5% it is likely that rates will start to rise again; but what we don’t know is when and how quickly they will increase. The rates on five-year fixed-rate bonds, say, might be very appealing – but rushing to squirrel away your cash in these could prove to be a mistake if rates soar by a few percentage points in a few years’ time.