Types of savings accounts
There are many different savings accounts offered by different financial organisations. All of these accounts have different terms and condition but the main variables are the interest rates and if there is a penalty to access your money. There are accounts that give a better interest rate but you have to leave your money there for a long period of time and others which pay you less interest but you can access your money when you wish.
Some accounts change there interest rate as the Bank of England changes its interest rate whilst other accounts have a fixed interest rate. Below is an overview of the main types of savings accounts available on the market today:
Instant Or Easy Access Accounts
This is probably the simplest of saving accounts. Most of these accounts can be opened with as little as £1 and you have instant access to your money at anytime you wish. If one month you need some extra money you can take some from your saving account without any penalty. The interest rate for these accounts is variable and changes with the Bank of England Base Rate. It is worth keeping an eye on the interest rate as if it falls to low it may be worth moving your money into a savings account which gives you a better rate of interest.
Notice Accounts
This is for people who don’t need instant access to there savings. To open an account you normally need to deposit a few hundred pounds. You can access your money without a penalty but you have to give notice to when you are withdrawing your money. This can vary from 30, 60, 90 or 120 days depending on your account. If you do need your money instantly you can access it but there will be a penalty charged depending on the amount you want to withdraw and the current interest rate. The interest rate for these accounts is again variable and based on the Bank of England Base Rate.
Regular Saver Accounts
These are savings accounts where you deposit a fixed amount of money every month. This can vary from as little as £10 a month or to a maximum of about £250-300 a month depending on the bank. You normally can not change the monthly amount and you have to decide this when you open your account. These accounts can be opened as instant access or notice account and you could face a penalty if you withdraw money or if you miss a monthly payment.
Fixed Rate Accounts
Fixed rate accounts offer a fixed rate of interest over a period of time. The length of time can vary from 6 months to 5 years and the general rule is the longer the term the higher the rate of interest. At the end of the term you get your capital back with interest paid on that amount. The minimum amount to open one these accounts can be as high as £10,000 but there are some accounts where the invested amount is much less. You can not add to this amount over the term neither can you access the money so this is an option only if you are in a position to lock your money away. If the Bank of England drops their interest rate your rate will not change therefore you can earn more interest than others and if the Bank of England increases their interest rate then you could be losing out.
Children’s Saving Accounts
Children’s savings accounts are a great way to start saving for your son or daughters future. They operate in the same way as most savings accounts and when you open the account you will probably be offered a gift. Remember for this little gift the bank potential has your child’s business for the rest of their life as not many people change their bank accounts once its all been set up. Children have the same tax allowance as adults but most will not deposit that much into their accounts. If a parent is depositing money into their child’s savings account and the interest generated is more than £100 a year then the parent will have to pay tax on this amount.
Child Trust Funds
If your child is born after 1st September 2002 and is eligible for child benefit then you can open a Child Trust Fund. This is a government scheme which has been put in place to help parents save tax free for there children. New born children receive a £250 voucher when they are born, children from families with lower income receive a £500 voucher and then when the child is 7 years old he will receive another £250 from the government. In addition to this amount you may deposit a maximum or £1,200 a year into this account. All this is tax free. Money in this account can not be withdrawn until the child is 18 years old.
Additional information can obtained by visiting the official Child Trust Fund website.
Individual Savings Accounts (ISA’s)
Individual Savings Accounts (ISA’s) work exactly like most other saving accounts but the only difference is that this saving is tax free. The tax allowance today is £7,200 for the current tax year which runs from 6th April to 5th April the following year. This means you can invest up to £7,200 in an ISA and you will not get taxed on this money. On all other savings accounts the basic tax payer pay 20% tax on the interest earned whilst high tax payers pay 40%. So every year you should utilise your tax free savings allowance and make the most of it.
There are 2 main components to ISA’s; Cash, Stocks and Shares. The Cash ISA can be opened at any Bank or Building society and is the safest way to invest your money. The Stocks and Shares ISA is normally opened with a financial company or independent broker who will invest your money in bonds, trust funds, shares and other insurance policies. This is probably a good idea if you are going to invest over a long period of time as history shows this ISA can be much more beneficially then the Cash ISA. On the flip side to this you must note that investing in Stocks and Shares can mean you could lose all your money.
There are two types of ISA’s and you can only invest in any one of them every year, they are called the Mini ISA and the Maxi ISA. The Mini ISA allows you to open two ISA in a year investing £3,600 into a Cash ISA and a maximum of £3,600 into a Stocks and Shares ISA so you can split your invest into two different ISA’s. The Maxi ISA allows you to open one ISA and you can invest all the £7,200 into stocks and shares or invest up to a maximum £3,000 into cash and the other £4,200 into Stocks and Shares. This means if you invest in the Maxi ISA, some of it has to be invested into stocks and shares.
With any type of ISA it is not advisable to withdraw any money as you are not allowed to top it up again. You have to wait for the following tax year to re-invest.
Savings Accounts Guide |
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