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Saving: Make the Most of your Money
 Get the right account for your needs
The world of saving can seem a bit complicated when we’re bombarded with all the different types of savings account. They all have different rates with confusing clauses. We’ve decided to make your life a whole lot easier with this guide to saving which explains (in a language you can understand!) what you can do with your savings and how to get the best account for your needs.
What accounts are thereHere's a quick rundown of all the different types of savings account available: Instant/easy access accounts: These are flexible accounts that allow you to take out money at short notice. Once upon a time this meant that you would have to accept a poor interest rate but these accounts now offer some really competitive rates. The best on the market at the moment is the AA's internet saver paying 6.46% AER.
Notice accounts: These only let you access your money when you give a certain amount of notice before withdrawing. The notice periods are anywhere between one and three months. If you don’t give notice you will usually have to pay a penalty and will lose interest. Some notice-based accounts may offer a bonus if you make no withdrawals at all within a year so do check. Anglo Irish Bank has a seven-day notice account has a rate of 6.55% with a minimum deposit of £1. If you want a longer notice period get the Derbyshire BS Postal 60 Triple Guarantee account which offers the same rate of 6.55% but requires 60 days notice before withdrawal.
Saving bonds: Fixed-rate savings bonds are like most other savings accounts except that you agree to not touch your money for a set amount of time. The "bond" could last for anything between six months and five years. Generally a savings bond will give you more interest than an instant access account. Also, most bonds only let you deposit a minimum or maximum amount of money at the beginning as a lump sum and you won't be able to add any more. Some allow you to add money in during the term but most won’t, so you can only put a lump sum of money in when you open the account. ICICI have a 12 month fixed rate bond at 7.2% AER. However the minimum deposit is £1000 and ICICI is a foreign bank, so some may not be keen to put their money there. If you do want something with a lower deposit and closer to home, the Anglo Irish Bank pays 7.05% AER on their one year bond. Because it is an Irish bank, your savings are 100% guaranteed by the Irish government for two years.
Cash ISAs: An ISA works in the same way as other savings accounts except that you won’t pay any tax on the interest. There is a limit of £3,600 that you can put into an ISA in one year though. Always check to see how long a particular rate is going to last for. There isn’t much point choosing an attractive rate that only lasts for a few months. If the interest rate does drop you have every right to switch to another bank or building society with a better rate. BUT do not just take out the money then put it into another one because this will count as part of your yearly allowance. Instead, tell your current bank that you want to move your money to a new account and when you apply for the new ISA you can ask it just to be swapped into that account. The best online account at the moment is the Royal Bank of Scotland Instant Access Cash Isa at 7.25% AER.
Children's accounts: These work like ordinary savings accounts but they tend to offer better rates so it could be a good idea to open one. Ask for a Form R85 when you open an account so that the interest is automatically tax-free. Any money put into the account by a parent that generates interest of more than £100 a year will be treated as parental income and will result in that parent paying tax on it. Halifax has a Children's Regular Saver account with 10% AER fixed for 12 months. You do need to save between £10-£100 every month and cannot make any withdrawals.
Child Trust Funds: Child Trust Funds are like ISAs for children. Vouchers worth £250 are sent to you (the parent) to when your baby is born and you can put this into one of three types of funds: a savings account, stakeholder account or shares account. No money can be withdrawn until the child's 18th birthday. Once it’s open you (as well as family and friends) can put an extra £1,200 a year between you without paying any tax. Find out more here. Hanley Economic Building Society has a Child Trust Fund offering 7.75% AER.
The golden rules to savingHere are the golden rules to saving that you need to follow before you even consider putting any money aside:
Rule 1. Pay off any old debts. The amount you are charged in interest for debts will almost certainly be more than any interest you could make on your savings so do use any money you have to pay off debts first, then start thinking about savings accounts. If you are in debt now find out how to Beat Your Credit Card Balance and read our Step-by-Step Guide to Getting Out of Debt. Do check that you’ve got the best current account. So few people switch their accounts and they really should!
Firstly cut down your essential bills each month. Use the Moneymagpie comparison tables to find cheaper insurance (on everything from you car to your travel), cheaper utilities, cheaper phone and broadband and cheaper banking. Then always make sure you’re getting the best price for anything you buy by using price comparison sites like these:
Rule 3. Make some extra cash Go to our Making Money section for loads of ways to make extra cash quickly and easily. There are ideas to suit everyone so you’re bound to find something for you.
Rule 4. Set up a safety net Start putting money regularly into a high interest account which will be your 'safety net' savings. Keep saving there until you have enough to cover you for three to six months if you don't earn anything. You can set up several savings accounts - one for each thing you are saving up for. See our article on savings pots for more advice.
Sneaky tricks that banks use!
Watch out for … Interest being paid into a different account: There are accounts out there which offer an attractive rate, but some pay any interest into a separate account which means that you cannot earn interest on the interest you make. Find out BEFORE you open a new account and if this is the case then switch to one that doesn't!
Changing rates: Companies will often drop their rates without warning you so it's extremely important to keep an eye on them. Check our savings article each week to see which accounts have the best rates. If you’re bank does drop the interest rate make sure you move to a better account.
Bonus rates: One trick that many banks will use is to include a bonus rate for a set period (typically six months or one year) to make the interest rate seem more attractive than it is. Once the bonus period is over the rate could drop so take this into account when choosing. Unfortunately banks don't have to write to you when the bonus period runs out so you do really need to keep find out before you open any account with a bonus rate.
Hidden charges: Some banks may offer you easy access to your money but you end up losing interest in any month in which you make a withdrawal.
Free gifts: Be very wary of accounts that offer you exciting free gifts because they usually offer them to hide the fact that their interest rate is low.
Find the right account for your needsTake tax into account when calculating how much you will make on your savings. Any money you make on your savings will be taxed by the government so the interest rate you see is usually not quite the amount of money you will make in the long-run. Don't forget you can put £3,600 a year into your ISA. Also, if you have more than £35,000 in savings it's a good idea to split your money into different accounts with different banks because only the first £35,000 of your money is fully covered and refundable if the bank goes under.
Get a flexible account that allows you to take out your money easily and without losing interest. Don't forget to set up one account just for emergencies. Some of these accounts even come with a card that you can use to get money out from ATMs 24 hours a day. There may be a limit to how much you can take out though so do check to see that it’s enough to cover any emergencies. The AA have the best flexible account on the market, paying 6.46% AER.
Get a long-term fixed rate bond which keeps your money safe for years. The great thing is that you will know exactly how much money you'll be making each year. The best long-term options are: Anglo Irish has a two year bond paying a competitive 7.00%. The minimum deposit is £500. The next best is the Progressive Building Society paying 6.60% AER over two years with a minimum deposit of £500. For short term options have a look at the ICICI 12 month fixed rate bond paying a massive 7.2% AER. ICICI are an Indian bank, so if you prefer an account a little closer to home you can go for the Anglo Irish 12 month bond at 7.05% AER or their nine month bond paying 7.06% AER gross.
Get a Notice account. These accounts don't allow you to access your money unless you give them a certain amount of notice, so they force you into being disciplined about your spending and give you the time to think twice before you make a big purchase and dip into your savings. Anglo Irish Bank has a seven-day notice account has a rate of 6.55% with a minimum deposit of £1. Alternatively, get the Derbyshire BS Postal 60 Triple Guarantee account which offers the same rate of 6.55% but requires a minimum deposit of £250 and you need to give 60 days notice before withdrawal.
Put the first £3,600 of your cash savings into an ISA-wrapped account. Then put the rest into a savings bond. Currently the best rate around is the ICICI 7.2% AER 12 month fixed-rate bond. The minimum deposit is only £1,000 but there is no maximum deposit. Don't forget that it's not a flexible account so you won't be able to access the money during the 12 months. Click here for more information.
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Chiara Cavaglieri
Moneymagpie Moneypedia
31.10.2008
