As someone looking to build wealth, setting a household budget is the first step to making headroom between your income and your salary. When we can save money with every paycheque, we can pay down debt, start an emergency fund, put some of these savings into our investments and if we focus hard enough one day retire early.
Your financial goals are personal to you and your family. And no matter what your specific goal is, it’s no more or less valid than anyone else’s.
It all starts with saving money and in the UK the types of savings accounts vary widely. This is a great thing because no matter what your goals are, there’s generally a type of savings account that will suit your savings goals.
In this article we’re going to look at the types of savings accounts you can open right here in the UK and what specific benefits these might have depending on on your personal goals.
Easy access savings accounts
Instant access savings accounts
The most commonly used type of savings account is an instant access savings account. These accounts pay interest on any money you have saved in them and you can withdraw the money in your account whenever you want.
Many instant-access savings accounts are connected to your current account and allow you to transfer money into and out of the savings account with incredible ease. You’ll possibly want to do this for several reasons.
- Savings accounts earn a better return than current accounts
- You can open them with as little as £1
- You can add money whenever you have it available
- You can withdraw money whenever you want without penalty
Pretty much every bank you’ll find on the high street or online has its version of an instant-access savings account. By moving your money into this account from your current account, you’re benefiting from a better interest rate.
With interest rates at the the highest levels in over a decade, you can get a decent risk-free return on your savings, just by moving the money from one account to another.
For most people in the UK, an instant access savings account is the first type of savings account they should open. It provides many of the benefits of the other accounts we’ll cover in this article, with little to no friction in setting it up.
Credit union savings accounts
I am a huge fan of credit unions and in the past, I have held a credit union account, as has my wife and I’m pretty sure we have one for our daughter.. Usually, a credit union is a not-for-profit organisation, but it still provides a way for members to save and borrow in an organised manner.
The members of a credit union often have a common trait. They may work in the same place, live in a specific area or have joined a similar organisation such as a trade union.
Credit unions pool together their members’ savings and lend these out to other members. Usually at a reduced rate based on traditional bank lending rates. On the flip side, savers often get better returns from their savings than traditional savings accounts as the profits are retained in the organisation and distributed to members as dividends. This is slightly different to a fixed rate of interest you might receive from a bank. However, some credit unions also operate in this manner.
In recent years, credit unions have seen a huge digital transformation bringing them in line with the digital services banks offer. No longer do you need to deposit your cash over the counter into your credit union account, but rather digitally sending and withdrawing money is commonplace.
Long-term savings accounts
Child trust funds
Child Trust Funds (CTFs) are long-term tax-free savings accounts. Since January 2011 no new child trust funds can be opened, but if you were born between 1 September 2002 and 2 January 2011 a Child Trust Fund will have been opened automatically for you, even if your parents didn’t do this. At age 18, the money becomes legally withdrawable and completely tax-free.
There’s a good chance if you were born in that time and you’ve not heard about a Child Trust Fund, that it is working way in the background. Or if you’re a parent with children born in that age range, it’s time to look into it, as you can contribute up to £9,000 per year and let it grow tax-free until the child is 18. Then no further money can be deposited.
Child trust funds were replaced by Junior ISAs.
If you are not sure if you have a child trust fund, head over to the HRMC and follow the links to the “Find a Child Trust Fund” page. Fill in your relevant details and you’ll be able to check quite easily. And you should, because the average value of a child trust fund is around £1,900.
Regular savings accounts
Just like an instant access savings account, many banks offer a regular savings account for their customers. The primary difference between instant access savings accounts and regular savings accounts is that regular savings accounts often shave specific timeframes for savings to remain saved in their account.
This could be 3 months or 6 months, but most commonly this fixed rate is set at 12 months. Each month you commit to paying in a “regular” amount and in return, the bank will often offer a higher interest rate for the duration of the agreement.
There is a level of commitment required with this type of savings account as if you stop paying into the account or need to remove money from it during or anytime before the end of the agreement, you’ll often have a penalty to pay or will lose a portion of the interest earned. The access to your money is therefore limited and for some savers, this could be too restrictive in their financial plans.
Even if you only miss one payment, many banks will reduce the level of interest they’ll pay as part of your regular savings account. With this in mind, it’s important to ensure you can meet the commitment before you agree to this type of savings account.
Fixed-rate savings bonds
Fixed-rate savings bonds provide a guaranteed rate of return over the length of the term, usually 1 3 or 5 years. The amount of interest you’ll earn from a fixed-rate bond depends on both the interest rate and the length of the term – the bond duration.
When you take a fixed-rate savings bond, you place a lump sum into the account for a fixed period. You cannot top it up as you would with a regular savings account and if you remove your money in advance of the bond maturation date, you would lose some of the interest or a penalty would be applied to your account.
The benefit of the fixed-rate savings bond is that you are getting a guaranteed sum at the end of the agreed term, but with bonds, the general interest rate may not be as high as you could achieve with a regular savings account.
Tax-free/friendly savings
ISAs
If you listen to me long enough, you’ll notice that I mention ISAs a lot. They are awesome and for the majority of people a great way to save and if you use a stocks and shares ISA, to invest their money.
But today we’re talking about Cash ISAs and these are tax-advantaged Individual Savings Accounts that anyone who is a resident in the UK can use to save up to £20,000 per year. Any of the interest you earn on your savings within a Cash ISA grows tax-free and when you withdraw the money there is no tax to be paid either.
There are 4 main types of ISA available for adults in the UK. These include:
Cash ISA: A savings account where you can deposit cash, earn interest on your savings, and withdraw money without incurring any tax liabilities. Cash ISAs can be offered by banks, building societies, and other financial institutions.
Stocks and Shares ISA: This type of ISA allows you to invest in various financial instruments, such as stocks, bonds, and investment funds. Any returns generated from these investments, such as capital gains or dividends, are tax-free.
Innovative Finance ISA: Introduced in 2016, IFISAs allow individuals to invest in peer-to-peer lending platforms and other alternative finance products. The interest earned on loans made through these platforms is tax-free.
Lifetime ISA: This ISA, introduced in 2017, is designed to help people aged 18 to 39 save for their first home or retirement. Individuals can save up to £4,000 per year, and the government provides a 25% bonus on contributions (up to £1,000 per year). Withdrawals can be made for a first home purchase or after the age of 60; otherwise, penalties may apply.
Choosing the Right Account
Choosing the right type of savings account is a personal choice. For some people, the flexibility of an instant access account will be right for them, whereas others will want to put their money away and forget about it until the terms of their agreement are up.
The correct answer is always that your money is working for your benefit and any of the savings accounts noted before will be better than leaving your money in a current account with little to no interest.
Maximising Interest Rates
We are currently in a period of high interest rates and these are changing almost weekly. Keeping on top of your accounts and knowing where the best interest rates rates are is key to maximising the return on your savings.
And savings accounts aren’t the only way to maximise the return on your money. In my opinion, the only reason to save money is to invest it. Now I get a bit of heat for saying this and it is not without a few caveats.
- You need to have an emergency fund of 3-6 months of discretionary spending and
- Any sinking funds for upcoming purchases should be kept outside of investing accounts.
Yet in my opinion any money outside of these two saving requirements should be put to work through investing. And there’s a good reason for this. Inflation.
Choosing the right types of savings accounts
Let’s be real for a second. Being in the position to save money is a great achievement, but for those looking to build true wealth in their lives, saving alone won’t make you rich. Inflation reduces the true value of your savings and reduces the spending ability of your money. It does this slowly bit by bit and then bamm, your money is only worth half of what it was decades from now.
By investing in yourself, property or other investments, you would expect to earn a greater return than saving alone. And through investing we hope to build real wealth over time.
