Want to start saving but don't know where to start? Our Savings Fountain shows you where to stash your cash first, helping you maximise the interest you earn.
In a world of rock-bottom interest rates, you need to make sure you put your money into the right type of savings account in the right order - whether that's an ISA, bank account or a regular saver. We show you how it works.
Want to start saving but don't know where to start? Our Savings Fountain shows you where to stash your cash first.
In a world of rock-bottom interest rates, you need to make sure you put your money into the right type of savings account in the right order - whether that is a NISA, current account or a regular saver. We show you how it works.
In this guide
Two questions before you start
1. Do you have any debts?
If you do, it's far better to pay off debts before starting to save. The interest on your debts is much higher than the interest earned on savings. So pay off your debts with your savings and you're much better off.
In some circumstances, this can apply to your mortgage as well as credit card debts too. For more info on this, please read the full Repay Debts or Save? guide first.
2. Do you want to save or invest?
It's important to understand the difference between saving and investing as a start point.
The Savings Fountain
Different types of savings have different rules on how much you can put in and when. To max your interest, you need to pour money where it'll pay best.
Think of it like a champagne fountain - put your cash into the best-paying savings vehicle possible, then when that's full and overflowing, fill up the next best, and so on.
Bizarrely, some bank accounts' in-credit rates currently smash easy access savings accounts and ISAs. It's a loss leader to build banking customers - yet if you're prepared to switch account, rates are strong. Don't just focus on rate, aim to cover as much as possible at decent rates.
So max the best bank accounts before you move onto any of the other options.
Once you've filled your current account(s), start to trickle your money into regular savings. A regular savings account can pay high interest but it's only on a small amount of money.
While these accounts can pay slightly more than bank accounts, as you need to put cash in each month, you'd want to dripfeed it across from your bank account/top savings account anyway - hence why it's second.
Fixed-rate cash ISAs
Once you've maxed your regular savings account, move any money you don't need access to into an ISA.
A cash ISA is just a savings account where the interest isn't taxed (so you keep all of it). Anyone over the age of 16 in the UK can put up to £15,240 in an ISA each tax year (April 6 - April 5) and once in, it stays tax-free year after year.
Better still, with fixed-rate cash ISAs, unlike normal savings, you can get access to the cash within the term - though you'll lose some interest in penalties. Yet even if you withdraw early, these can still be winners.
Easy-access cash ISAs
If you know you'll need access to your cash then you'll need to go for an easy access ISA. Here there's no withdrawal restrictions, you can get your cash when you want it.
Don't forget if you've got old ISAs built up over the years you can transfer them into a better paying ISA. But NEVER just withdraw the cash and pay it in. Full help in ISA Transfers.
If you've still got money left, next consider whether you're prepared to lock it away without access - if so, you can fix with a locked in rate that's usually higher.
Do bear in mind if rates rise over the term you can't switch, so think carefully before fixing for longer than a couple of years. .
With whatever you've got left, anything you need access to stick it in an easy access savings account. Rates are lowest compared to everything else in the fountain, but you can deposit and withdraw cash at your leisure.
All the easy access savings deals have a variable rate, so you need to monitor them to ensure the rate doesn't drop (switch away if it does).
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10 quick savings tips
Before you rush off to pour cash in the fountain, here are a few key tips...
1. You pay tax on savings interest (if not in an ISA)
Any gains you make from savings outside an ISA will be hit with tax. So for higher rate taxpayers they lose 40% of their interest to the taxman, basic rate 20%.
2. Non-taxpayers - cash ISAs may still be worth it
Even though there's no tax gain, they often pay higher rates than equivalent savings, cash ISA fixes have more access, and if you become a taxpayer again, the cash is protected then.
3. Put savings in name of lower-rate taxpayer
If one of you pays tax at a higher rate, providing you trust each other, put non-ISA savings in the name of the lower taxpayer and you'll take home more. For those who aren't married/civil partners, there is a tiny risk if one of you died within seven years of this that there'd be inheritance tax on it.
4. How safe are your savings?
These days every sensible saver should ask “is my money safe?". The answer is simple. Provided your money is in a UK-regulated bank or building society account, it’s protected under the Financial Services Compensation Scheme (FSCS). Here’s the golden rule:
The first £85,000 per person, per financial institution is guaranteed (falling to £75,000 on 1 January 2016).
So, if you've got less than £85,000 (£75,000 from 1 Jan 2016), there's no problem. Those with bigger savings, in the unlikely event a bank or building society went bust, for total peace of mind shouldn't put more than £85,000 in any one institution (£75,000 from 1 Jan 2016). Spread it around instead. For full info, read the full Are My Savings Safe? guide.
5. Higher-rate taxpayer, consider Premium Bonds
It's not a straight like for like, the Premium Bond tax fund is 1.35% tax free, but someone with typical luck gets less. To decide if it's right for you see Premium Bond Probability Calculator and Are Premium Bonds worth it?
6. Check your local credit union or building society
On rare occasions these beat the rates above, though usually you need to go in branch. See Credit Union Finder.
7. Bigger savers - it can be worth filling your ISA first
The fountain above is based on current rates, but if you're a bigger saver, then maxing your cash ISA allowance each year means you're protecting an ever bigger pot of cash from tax. If cash ISA rates rise you'll be very glad they're covered.
8. Kids get better rates
9. Ditch and switch after introductory bonus rates
Introductory bonus rates are temporary interest hikes to attract new customers. They're actually a good thing for many, as they effectively act as a minimum rate guarantee during the introductory period - typically 12 months - promising you at least some interest. But once that period is over, the rate will often drop to next to nothing so make sure you switch.
10. Know the exact rate you'll get
Banks quote one of two different interest rates. The gross rate is the flat amount paid while the Annual Equivalent Rate (AER) takes into account interest compounded over the year. Check which rate you're being quoted and compare like with like. Read about the difference between AER and gross interest.