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How to find the best savings accounts
 

How to find

By Nevena Mulyachka and Mark Todd
Nevena Mulyachkais moneyhelpline’s marketing manager, specialising in money products such as insurance, credit cards, loans and savings. Mark Todd is one of the founders of energyhelpline and moneyhelpline. He is regularly on BBC1 and Radio 5 Live commenting on switching and saving.

Last updated on 12/01/2016



This guide will give you some guidelines on what to look at when comparing savings accounts and point you towards what our comparisons are showing to be the current best buys in the market.

Nowadays savings schemes are many and varied – so there’s a lot to consider.

Should you save or repay your debts?

A word of caution

Debts are usually expensive, whether they’re overdrafts, loans or on a credit card, and they’re almost universally more expensive to keep than any interest you might garner on your savings, especially when current interest rates are languishing.

Generally then, paying off your debts before you start to save is the best way to go, consider overpaying on your mortgage (making sure to keep something aside for emergencies). The only exception to this rule is if you’re credit card debt is moved to a super cheap 0% balance transfer card and you are very disciplined and not acumulating any more credit card debt.

Click here to compare balance transfer credit cards



Types of savings account

A word of caution

Whilst it is cheaper to repay debts than start building a savings pot, it’s always wise to keep some money aside for unexpected expenses, big buys and in case you find yourself losing your source of income. Depending on what plans you have for your savings, there are a range of different options available to you.


ISAa

ISAs, or as they are now called NISAs, are tax-free savings accounts in which anyone in the UK can put up to £15,240 a year in provided they are over 16. NISAs were introduced on 1st July 2014 and the biggest change was that all assets can now be held in either cash or stocks & shares, or a combination of both.

There are a few confusions that are commonly made:

1) With an easy access ISA, money can be withdrawn whenever without losing tax benefits. From April 2016 ISAs will be fully flexible meaning that if you withdraw money from it over the course of the year, you can pay in the same amount of money back into it, so you can cover short-term needs without damaging your tax-free savings.

2) Each tax year (April- April), everybody over 16 gets a new cash ISA allowance. However, if you haven't used your allowance the year before (or didn't reach its limit) you can't carry over the difference into the year ahead. Also, whilst you can have lots of different ISAs from different providers, you can only have one open in each tax year - without adding to the others.

3) If your savings from past years are stuck in a dud savings account with poor interest rates, you can transfer this money across into an ISA with better rates.

With stocks and shares ISAs, you pay no Capital Gains Tax (CGT) so if the value of your investment rises, the gain you make is tax free. There's also, usually, no tax on interest earned and you tend to get a better return - although there is a greater risk that you may lose the money.

Help to Buy ISAs which are designed to help first time buyers get on the property ladder launched on 1st December 2015. Anyone who hasn't owned a property before can take out this type of ISA and benefit from government help. You are allowed to pay in £1,200 in the first month and £200 per month afterwards and if you use the savings towards buying your first home, the government will give you 25% bonus up to £3,000. This means that the maximum you can save to get the bonus is £12,000.

Click here to compare ISAs.


Fixed rate saving

These are where the amount you earn is guaranteed over a set time period and their rates are usually higher than those for easy access savings. However, usually you can't access the cash during that time.

The catch: If normal, flexible savings rates were to increase whilst your money was tied up, you would be unable to ditch the scheme and switch to a better account.

Click here to compare fixed rate savings.


Peer to Peer

Peer-to-peer schemes are relatively new to the savings scene and whilst they stand to earn you much higher rates of interest, they are also more risky. Peer-to-peer websites have been one of the financial success stories of the past few years. By cutting out the middleman (i.e. the bank), they’re able to directly link the borrower and the lender, cutting out strict requirements and banking charges. Furthermore, since they’re not guaranteed by the government's Financial Services Compensation Scheme, they also have the benefit of having no FCA-regulation costs and are therefore able to charge relatively low fees and then give better interest rates to savers.

However, cutting out the FCA clearly means there is a greater degree of risk as your savings won’t be covered by the government should the companies become insolvent. Read our ‘How safe are your savings’ guide to find out more about the risks involved.

Click here to compare peer-to-peer savings.


Easy Access

It’s crucial to consider what sort of access you’ll want to your money as there are a number of different options available to you. If you’re not saving up for a long term nest egg, and rather, are looking to set money aside for a big spend or any unexpected expenses, then easy access savings are the way to go. This refers to both instant access (where you can do an immediate cash withdrawal via a branch) and no-notice accounts (where in practice, it will take a few days to get your hands on the money).

The catches:

- Some accounts require you to give notice to withdraw, perhaps up to 180 days, which means your cash is locked away (unless you pay a penalty to withdraw).

- Some accounts limit the number of withdrawals you can make a year. Others won't pay interest in any month a withdrawal is made. This can significantly impact how much interest you get and how good your deal is. The terms for these circumstances vary between accounts, so make sure to be clued up to how much a withdrawal will actually cost - if you think you may exceed what's allowed, then go for a more accessible account.

- Be aware that lots of accounts are marketed as easy access even though they have strict limits on when you can make a withdrawal. For example, if you’ll want an emergency savings fund for the unexpected expenses, an account that won’t let you take money out more than a couple of times a year is not ideal.

Click here to compare easy access savings.


Fixed rate saving

It's no secret that the interest rates of traditional savings accounts are not great, so savers need to get creative to get better interest rates. One way to do this is by getting a current account which offers a high interest rate on the in-credit balance up to £2,000-£20,000. The top high-interest currents accounts on the market offer between 3-5% interest rates.

In order to benefit from the interest rates, you need to be aware if the account requires a monthly minimum payment. These can range between £500 - £1,500. You can still cleverly work around these minimum payments with a series of direct debits between accounts.

Click here to compare high interest current accounts.



Financial Protection

Provided your money is in a UK regulated bank/ building society, you’re protected by the FSCS (Financial Services Compensation Scheme) for up to £75,000 per financial institution you bank with. The protected amount decreased from £85,000 to £75,000 on 1st January 2016.

Do you have a large sum to save?
If you have a large amount of savings, in excess of £75,000, make sure to keep yourself fully protected by spreading your money over several accounts so you don’t exceed the £75,000 protection limit.

Do you have a joint account?
As for couples with joint accounts, never fear, as the cash in joint accounts counts as half each, so you’re effectively covered for £150,000. However, if you have an individual account with the same bank, this complicates things further as you’re still only covered £75,000 per person, per financial institution and the amount in your individual account and joint account will be counted together.

Do you bank with sister banks?
Since the protection is assigned ‘per institution’ rather than ‘per bank’, the issue can be rendered even more complex with big banking conglomerates that include more than one bank and as sister banks, you’ll only get £75,000 of cover if you hold multiple accounts between them.

Read our ‘How safe are your savings’ guide for more info on financial protection.



Tips and Tricks

  • Savers can set up a web of standing orders to bounce income into and out of the accounts to meet their requirements.
  • If you plump for peer-to-peer lending to up your returns, to reduce your risk, don’t put all your money in one pot, if you have large amounts then try to spread them around the big 3.
  • Beware of the restrictions on savings and high interest current accounts - you may be penalised if you violate them.
  • If you’re married and one of you pays a lower rate of tax than the other, it's financially worth considering whose name you save in. Put it in the lower rate taxpayer's name and you'll get more interest.
  • Introductory bonus rates are temporary hikes in interest by savings accounts in order to attract new customers. To maximise returns use this to your advantage and jump from one introductory rate to another by opening a new account with a different provider one your current deal runs out.


Watch out for...

Be aware that banks sometimes quote different interest rates (AER and gross rate) and always compare like with like. The gross rate is the flat amount paid in interest while the AER is the interest compounded over the year.



 

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 These guides are for informational purposes only and do not constitute advice. For best personal advice contact a financial adviser.

 
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