Guide to Savings

Frequently Asked Questions Index

1. Should I save or pay off debts?
2. What are the different ways I could save?
3. Why should I save?
4. Should I be saving for the short-term or the long-term?
5. What's an ISA?

Should I save or pay off debts?

If you’re thinking about saving, but you have large outstanding debts, it’s usually better to clear your borrowing first. That’s because you’re likely to pay out more in interest on your debts than you’ll get back from returns on your savings.

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What are the different ways I could save?

When it comes to traditional ways to save there’s a huge range of savings plans from a wide variety of providers. Savings accounts normally fall into one of the following categories:

Instant access
This type of savings account lets you put money in and take money out whenever you like. There are no interest penalties but you usually pay for the convenience by accepting a lower rate of interest. Some instant access accounts have tiered rates of interest, so the more you put in the more interest you receive. Others may pay a bonus or higher rates of interest if you only make a few withdrawals.

Regular savings accounts
These are ideal if you want to build up your savings over a period of time, putting anything from a small amount to a large sum away each month. However, to get the best returns you have to stick to the rules of the savings account.

Notice accounts
Notice accounts are usually designed for larger lump sums, and for money that you won’t need back in a hurry. You generally get a higher rate of interest than an instant access account. The longer the notice you agree to give, the higher the interest you receive. If you don’t give the right amount of notice you lose interest.

Bonds
There are two main types of bonds - fixed and variable. A bond is usually an account where you leave your money for a fixed length of time. So you really are making a bond, promising that you won’t ask for your money back early. In return you are promised a higher interest rate than on other types of savings accounts.

Children’s accounts
Many banks and building societies have special accounts for children that can be opened with just a few pounds. You don’t usually have to pay tax on children’s accounts as long as you fill out a special Inland Revenue form.

Tax efficient savings
Tax efficient savings allow you to minimise the tax you pay on your savings. The main type of tax efficient savings products is an ISA. However, there are other types of tax efficient savings, such as National Savings, pensions and insurance plans.

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Why should I save?

There are two main reasons why everyone should put some money by for the future:

1. Unexpected costs
Your finances may be finely balanced at the moment. But what happens if you suddenly face an unexpected cost? From new tyres to a leaking roof, once you start making regular savings you’ll be better prepared for the unexpected.

2. Saving for known expenses
Holidays, new cars, weddings, university fees – a lot of your future expenditure may well be very predictable. You can either pay for it when it happens by borrowing money and paying interest, or you can start saving now and earn interest. So why not plan ahead and set up a regular savings plan.

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Should I be saving for the short-term or the long-term?

Short-term
If you are likely to need fairly immediate access to your cash, your best bet is probably the basic traditional bank or building society type deposit account. The interest will be fairly minimal, but your money will be safe, and available when you need it. You can also choose to take out a Cash ISA, giving you slightly better returns than standard deposit account rates because of the tax advantages. If you can afford to tie your money up for slightly longer periods, say from 12 months to 3 years, you could consider guaranteed growth bonds. These are issued by insurance companies and roll up the income to be paid out at the end of the pre-arranged term.

5 years or more
If you can lock your money away for 5 years or more, you could really consider getting some exposure to equities. Over the longer term, you should be able to cope with the volatility of the stock market and get decent growth from your investments. The riskiest way to invest is directly in shares. For direct equity investment you should really be prepared to buy shares and not worry about the performance for 10 years or more. It goes without saying you should keep an eye on the share price and take profits where necessary, but in general terms you should be prepared for a long, sometimes bumpy ride.

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What's an ISA?

ISAs replaced PEPs in 1999, and allow you to invest in areas such as, Unit Trusts or OEIC’s in a more tax efficient way. ISA’s are generally considered to be a medium to longer-term savings plan, and offer investors tax benefits from a considerable range of ISA products.

Since the Government is keen to encourage people to save, ISA’s are free of Capital Gains Tax and personal income tax liability, but there is a limit to how much you can invest.

Currently, you may only invest up to £7,200 per tax year, of which up to £3,600 may be in the form of cash deposits (i.e. in a bank or building society account). For a married couple, this allowance means that you could invest up to £14,400 annually tax efficiently, but these allowances are annual, meaning that you can’t go back to missed years.

ISA’s can be invested in by way of one-off lump sums, multiple lump sums or smaller regular payments. If you choose to invest in ISA’s by making regular payments, you have the potential to benefit from ‘pound-cost averaging’. In short, this helps to smooth out some of the ups and downs of the stock market, by purchasing more shares in stocks when the prices are low, and less when the prices are high.

ISA’s fall into 2 basic categories - Stocks and Shares and Cash ISA’s.

Stocks and Shares ISA

• Offered by a single provider.
• You can invest up to £7,200 in the stocks and shares component, less any payment into a cash ISA in the same tax year.

Cash ISA

• You can invest up to £3,600 in cash.

As ISA’s can involve investment, you need to bear in mind that this will also introduce an element of risk. If in doubt, get specialist advice.

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