10:07 02 May 2013
Savings rates have plummeted since last summer and the introduction of the Funding for Lending scheme, which, despite providing cheap money for banks to lend with, has removed any pressure for them to attract deposits from savers. As a result, many banks and building societies have slashed the returns on offer, making it difficult for savers’ cash to keep pace with the rising cost of living.
And the government’s recent announcement that the scheme will be extended by another year until 2015 is yet another hammer blow to savers, as it means they are likely to face paltry returns for even longer.
But despite all this doom and gloom, there are several important reasons why saving shouldn’t slip to the bottom of your agenda regardless of the rate you earn. We look at why all of us should build a savings nest egg, as well as some of the best homes for our cash.
Why building a savings nest egg is so important
What would you do if you suddenly needed to get your hands on some money for urgent home or car repairs, or to help tide you over if you were ill and unable to work? If you don’t have any savings in place, the chances are you’d have to borrow it, adding to your worries at what is already likely to be a stressful time.
Experts recommend trying to build up a savings nest egg equivalent to about three months’ net income, so that you have funds available in the event of an emergency. Many people save for other reasons too, whether it is to put down a deposit to buy their first home, or to put towards higher education costs. Whatever the reason, or your savings goal, squirrelling some money away each month will reap rewards over the long term.
Earn interest tax-free
If you are starting to save for the first time, tax-free individual savings accounts (ISAs) should be your first port of call, as any interest you earn will be free of income tax.
This tax year, (2013/14) you can invest up to £5,760 in a cash ISA, and the same amount into a stocks and shares ISA, or you can invest the full £11,520 allowance in stocks and shares alone.
On top of the tax-free element, several cash ISAs pay decent rates of interest and can be opened with a minimum investment of just £1. When choosing which account is right for you, think how you want to operate it – for example, do you want to be able to visit a branch to discuss your savings, or are you happy to bank online, over the telephone or by post?
If you prefer to use post, then the current market-leading cash ISA is Cheshire Building Society’s ISA Saver (Issue 3) account, although you will need a minimum investment of £1,000 to qualify. You can make unlimited withdrawals and deposits by post up to the annual £5,760 allowance. And while it might not be relevant now, you can also transfer in money held in ISAs opened in previous tax years. Although this account is operated by post, you can apply online. Bear in mind that the rate includes a 1.80% bonus until October 2014, so you will need to move your money once this disappears.
Other competitive cash ISAS which can be operated by post include BM Savings ISA Extra Issue 5, which pays 2.10% annual interest tax-free – and this time you only need a minimum investment of £1. Again, this rate includes a bonus of 1.60% for 12 months, so you may want to move your money at the end of this period. You can apply for the account either online or by telephone, but then any transactions you make must be made by post.
Savers who prefer to operate their accounts online may instead want to consider Nationwide Building Society’s Easy Saver ISA Issue 1, which pays 2.25% and, again, can be opened with just £1. This account can also be operated in branches and the rate includes a 1.75% bonus until the end of October 2014, so again you will need to move your money once the bonus ends.
All these accounts are easy access ISAs which means you can get your hand on your money at any time (though, clearly if it’s by post it won’t be immediate) – and this could be an important clause if you are new to saving.
Easy access accounts
Standard easy access accounts are also available and are a great ‘next step’ if your savings habit goes well and you ever exhaust your annual ISA allowance.
If you are an online saver, Nationwide Building Society’s e-Savings Plus account pays an annual equivalent rate (AER) of 2.00% on a minimum investment of £1. Beware thought that this account only allows five free withdrawals a year – if you make any more than this you’ll earn a much lower rate of interest of 0.10%.
Nationwide also offers the MySave Online Plus account, which pays 1.70%, but you’ll need a minimum investment of £1,000. This rate includes a 1.19% bonus for 12 months, but if you make any more than one withdrawal, you’ll lose the bonus and only earn 0.10% AER in the month the withdrawal is made.
Other competitive online easy access accounts include West Brom Building Society’s WeBSave Plus 3 account, which pays 1.80% again on a minimum investment of £1,000. However, a charge will be incurred if more than one withdrawal is made a year.
If you prefer to operate your savings in branches, then West Brom’s Branch Easy Access Saver Issue 3 pays 1.80% AER on a minimum investment of £1,000. You can make withdrawals whenever you want, but a charge will be incurred if you make more than two in a year.
If you are brand new to saving and don’t have £1,000 to invest, Scottish Widows Bank’s Instant Saver account pays 1.00% AER and can be opened with £1. This account can be operated online, by post or by telephone. Similarly, Barclays e-Savings Reward account can be opened with £1, and pays 1.26% AER. This rate includes a bonus of 0.75% for the first 12 months, and the account can only be operated online.
TIP! Whichever account you choose, set up a regular Direct Debit each month for the amount you can afford to save to be transferred from your current account to your savings account. That way, you don’t have to remember to pay into your savings each month, as it will be done automatically.
Don’t forget your own bank
Remember to check whether your bank has any competitive savings accounts available for existing customers. If you can afford to put aside a little every month, many banks offer regular savings accounts paying high rates of interest to customers who already have a current account with them.
For example, First Direct’s Regular Savings account pays 6.00% AER to 1st account customers who can put away between £25 and £300 a month, while HSBC pays 4.00% AER again on a minimum investment of £25 a month up to £250 a month. But must be an HSBC current account customer to apply.
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