Savings Accounts

Keeping money safe and productive is a priority for many people, and the different options from ISAs to bonds to traditional accounts provide different benefits

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Financial stability is one of the top priorities of UK citizens, and knowing that your money is being safely stored in a way that works for you is hugely important. Creating a stable stockpile of cash is vital for anyone who’s saving to buy a house, to start a family or simply for a rainy day, but it can be confusing and difficult to pick out the best deals in the crowded modern marketplace. There are as many types of savings options as there are savers in the UK, with more and more bespoke solutions coming to market each year, and each product offers a different range of benefits. Knowing which is best suited to your needs is vital before choosing a savings product, and in this article we’ll cover the most popular savings products in the UK today.

While many savings services offer high-quality products, it’s important for consumers to select ones that are appropriate to their circumstances; while peer-to-peer investment might make an excellent choice for one saver, the potential to suffer from bad debt might make it unappealing to another. It’s therefore vital for savers to thoroughly research the savings products they’re considering before making any investments, and to consult their financial advisor before committing to any one product.

What Makes a Good Savings Product?

Knowing which savings product to select is more difficult than it might sound, because there’s more to savings than simply picking the highest interest rate available. Before we dive into the world of savings products, let’s quickly discuss some of the main aspects in which these products differ from each other.

Interest:

This is the big one, for most people. A rate of interest that exceeds inflation means that savers can actually make a profit from their savings, and knowing that your hard-earned money is slowly growing is highly attractive to most savers. You can’t have it all, though, and high-interest savings products generally aren’t as flexible or safe as other options.

Flexibility:

Being able to quickly and easily access money can be very handy, and products like instant access savings or current accounts let you do just that. Some options don’t, though, and long-term financial investments like ISAs and bonds will tie money up for several years.


Stability:

People want savings they can rely on, and knowing that your money is in safe hands is a big plus to any savings product. However, some people want to make their money work harder for them, and are willing to sacrifice a little stability for the promise of a bigger profit. While ISAs, bonds and bank accounts are highly stable, usually being backed by the Financial Services Compensation Scheme, peer-to-peer lending services often enable investors to choose higher-interest products with a higher risk factor.

Input Level:

Some people want a savings account that they can “set and forget”, which requires little to no input from them. On the other hand, some people are willing to get a little more hands-on, usually for the promise of a higher return - most savings products can be left alone, but some P2P lending platforms and current accounts can require a greater investment of time.

Easy Access Savings Accounts

Putting your money into a savings account is possibly the most straightforward way to keep your money safe and stably saved. With accounts like these there is very little in the way of risk, and savers can rest easy in the knowledge that their money is protected by the FSCS (which guarantees the first £85,000 of savings). These accounts are not designed to be used for everyday transactions, and as such they reward savers who pay in a lot of money over a long period of time; there is often no “ceiling” on the balance which receives interest, so a saver’s full balance receives interest payments.

Savings accounts are quick and easy to access, with no notice period necessary, but can be fairly inflexible for day to day use. Because they aren’t supposed to be used to pay for things directly, they often don’t come with a debit card, though it is still sometimes possible to use online banking to keep track of payments. The big downside to savings accounts, though, is the low interest rate available on most products; typically, these are considerably lower than are available through other forms of savings product. A good savings account will usually offer an interest rate that at least meets the current rate of inflation, which means that savers won’t find their money losing value. Most financial experts recommend keeping 3-6 months of living expenses in a savings account “just in case”, and investing any excess savings in more profitable savings formats.

Good For:

  • Quick access
  • Keeping money safe
  • No balance limit on interest payments

Don’t Forget That:

  • Interest rates are low
  • Savings accounts are not designed for meeting everyday expenses

High Interest Current Accounts

In terms of flexibility and overall variety, it’s hard to beat modern current accounts. There are a vast number of different products on the market now, and each one offers different combinations of benefits and perks that suit particular groups of consumers. The rewards that can come with a high interest current account make them attractive for many savers, but choosing the right account is important before making a decision.

Firstly, current accounts are designed to be used every day, and come with debit cards (most of which are now contactless). Combined with the option to connect online banking and mobile payment services to the account as well, current accounts are great for paying everyday expenses. Depending on the provider, a current account will also generally offer a much more generous rate of interest than a savings account will, and will usually exceed inflation - savers can actually make money from their savings. However, there are a few caveats to the interest rates most banks offer. There is almost always an upper limit to the balance which receives interest; for instance, a popular current account may offer 3% interest but only for the first £1,500 in the account. This means that any money over and above £1,500 will be earning no interest at all, and would be better off invested elsewhere.

Current account providers also want to know that their account holders are actually using their bank accounts, not simply dumping money in them to make a profit. To do so, account providers ask their customers to meet several requirements, usually a monthly pay-in of several hundred pounds and at least one recurring direct debit (though there may be other requirements as well). Although this is no problem for savers with a single current account, as this mostly reflects how people use them, it does make it tricky to save in several different accounts at once. This can be circumvented to a degree through the use of standing orders, and it is possible for one saver to hold several accounts simultaneously, but it does require an investment of time to set up.

There are many different combinations of interest and benefits available from different banks, and while many are free to use, some banks will charge a monthly fee of up to £10. It’s vital for consumers to understand the costs of these products before investing in them, because a year’s interest can easily be wiped out by the costs of an account like this. Some accounts are linked with insurance packages, and can offer account holders a cheap option for these vital services, but it’s important to check whether these are competitively-priced and useful or not.

In the last few years, banks have begun offering a high speed switching service for customers, as well as financial incentives of up to £130 to do so. The ability to seamlessly switch from one account to another is a big benefit to consumers, and means that it’s always worth keeping on top of the best interest rates. However, in order to claim these bonuses it’s important that savers meet the necessary requirements of their new bank, which might need them to pay in a certain amount of money in a specific time frame in order to qualify.

Good For:

  • Flexibility and day-to-day use
  • Quick switching and cash bonuses
  • Good interest on limited balances

Don’t Forget That:

  • Savings above interest thresholds won’t generate interest, so high balances go unrewarded
  • It can take time and effort to make a profit if you need to open several accounts


Peer to Peer Investment

A new and innovative form of finance has taken root over the past decade, making use of growing digitalisation to create a quick and easy funding platform for individuals all across the UK. Peer to peer lending is a straightforward arrangement, where a lending intermediary connects investors with borrowers in order to facilitate quick and easy lending. Over the past few years this sector has gained growing recognition as one of the best choices for both borrowers and lenders, and the vocal predictions of many that P2P lending would prove to be unsafe and unreliable have been shown to be unfounded.

There are dozens of different lenders in the peer-to-peer sector, each specialising in different types of loan. Some lenders focus on buy-to-let property mortgages, some on personal loans, some on commercial finance and others on high-value bridging loans. Each platform operates differently, and while some might require investors to select specific loans to approve, others are much more hands-off and allow investors to simply automate their lending.

Without the high overheads of mainstream banks, peer-to-peer lenders typically offer higher interest rates and no interest cap. This makes it exceptionally attractive to savers who want to generate income from their savings, because it allows them to allocate as much money as they wish to lend out. Some lenders offer a range of investment products to their clients as well, and will allow them to choose between high-risk loans with a higher return, or safer products which have a lower interest rate. Though many P2P accounts do not allow for instant withdrawal, it is possible to find products that allow savers to draw money out immediately.

It’s important to note that while the market-leading P2P lenders have a very good track record of stability they are also not covered by the FSCS. This means that there is no guarantee the money will be repaid if the lender goes under, and individual lenders will be left to reclaim their loans themselves.

Good For:

  • Good range of options - risk/reward and ease of access
  • High interest rates

Don’t Forget That:

  • There’s no FSCS cover


Individual Savings Accounts (ISAs)

UK savers are able to access a range of financial products known as ISAs. These savings products allow investors to place up to £20,000 in savings over the course of the year, and pay no tax on the interest they receive. There are several different varieties of ISA, each of which is designed to meet the needs of different investors, and savers are able to split their £20,000 allowance between multiple different products if they wish.

Lifetime ISA:

The new Lifetime ISA (LISA) is designed to replace the ISA that was part of the Government’s “Help to Buy” scheme. This ISA comes with several key benefits, chief amongst these the ability to claim a 25% bonus from the Government if the ISA is used to purchase a home. Because up to £4,000 per year may be invested in the LISA, this can allow first-time buyers to accrue a significant bonus when they buy their first home.

LISAs are available as either a Cash ISA or a Stocks & Shares ISA, which allows savers to choose how their money is held and invested. There are penalties for withdrawing from this type of ISA, and a 25% charge is made on any withdrawals while the account holder is under the age of 60.

Cash ISA:

A cash ISA is a simple way for savers to invest their money without exposing themselves to tax bills. Typically a cash ISA will offer a similar rate of interest to a savings account, but without the option to withdraw money quite so easily. For high balances this may be well worth it, as the protection from taxes may be valuable, but for lower balances this may not be the most productive investment option.

Stocks & Shares ISA:

As the name implies, this form of ISA allows savers to invest in the stock market through their ISA, and to avoid paying tax on any capital gains or interest accrued throughout the year. This offers the opportunity to make a higher return than a Cash ISA, but also exposes savers to the risk of the stock market, where investments can fall as well as rise.

Innovative Finance ISA:

This final form of ISA is designed to reflect growing investment in the P2P lending sector. “IFISAs” allow savers to wrap their peer-to-peer investments in a tax-free ISA which helps them to generate more income from their savings. This form of ISA is inherently susceptible to the same issues as peer-to-peer lending in general, and though it may offer substantial rewards for savers it’s still not as secure as a Cash ISA.

Good For:

  • Growing savings
  • Investing for the future

Don’t Forget That:

  • Not a lot of flexibility - many penalties for withdrawing early


Bonds

A bond is a fixed-term deposit, with a fixed interest rate attached to it - customers decide how much to invest, for how long, and hand their money over. At the end of the term they receive their money back with interest, but won’t be able to access it during this time. These savings products can be a really good way to invest an almost unlimited amount of money (up to £1M per bond), and savers can count on a certain return of interest at the end of the bond term. With interest rates generally beating those on offer from savings accounts, bonds offer savers who want to generate a little income a better option, but at the cost of locking their money away for a given length of time.

Generally speaking, a longer-term bond will pay a higher interest rate than a short one, so those who can afford to lock money away for longer stand to benefit more from this form of investment. This makes bonds well-suited to savers who already have other savings in place, and can afford to put money away for a long time.

Good For:

  • Generating a long-term return
  • Security and stability

Don’t Forget That:

  • There’s little flexibility
  • Interest rates aren’t as good as current accounts

Which Savings Product is Right for You?

As we’ve seen throughout this article, there are many different options available to savers. The different benefits of each product make them ideally suited to different individuals, and each type of product will meet different needs. Generally speaking, the best method for savers is to diversify their investments; there’s no need to pick just one product. Instead, savers should select several products that meet their needs, including at least one savings or current account to meet their daily needs - this guarantees a balanced portfolio that isn’t too heavily reliant on any one product.

National Association of Commercial Finance Brokers Financial Services Authority Association of Short Term Lenders Association of Bridging Professionals

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