10 things you need to know about saving
With money tight and many households juggling to make ends meet, it's tough to save at the moment. And with the Bank of England base rate at a historic low of just 0.5% you might also think there's little point.
Recent research carried out by MoneySupermarket found that 47% or people have stopped or reduced the amount they save in the past year. However, whether it's for a family holiday, Christmas, a deposit for a house or you and your family's longer term future, it is well worth getting into the habit of saving.
Whether you are saving for the first time or wanting to find the best home for an existing nest egg, we look at 10 things everyone should know about saving...
1. Even a small amount a month makes a difference
Regular saver accounts are great if you are looking to start saving for the first time or get into the habit of putting money away regularly.
Regular savers pay a fixed rate of interest for one year and you can't access your money during that time. You will usually have to pay money into the account every month during the 12-month term, although the minimum amounts are low - typically £20 or £25.
The maximum you can pay in is also capped. This varies depending on the account but tends to be £250 to £300 a month. The reason for this is because regular savers often pay higher rates of interest than you get on more flexible easy-access savings accounts.
Obviously, because you can't access your money for the term of the deal, a regular saver won't suit everyone but it can be a great option if you want to resist the temptation to dip into your savings.
2. You can save without relinquishing access to your money
If you want a flexible savings account that allows you to pay money in on an ad hoc basis, or dip into your savings when you need an easy access account is what you need.
You can open an account with as little as £1, although some deals do have higher minimum deposits so watch out for this.
3. Watch out for introductory bonuses
The rates on easy-access accounts are variable and many of the leading deals include introductory bonuses to boost the return for a certain period of time. The bonus period usually lasts for one year, after which time the rate will plummet, so you should be prepared to move your money again at this point.
Not all easy-access accounts have a bonus, so if you don't want to open a new account after the first year it is worth considering one of these products. However, you will probably have to accept a slightly lower rate of interest and remember, the rate is variable so it is still important to keep an eye on what your account is paying.
4. Some easy-access accounts restrict withdrawals
Although easy-access accounts allow you to access your money at any time, some products do limit the number of withdrawals you can make each year. If you make more than the permitted number of withdrawals there will be a penalty, usually a reduction in the amount of interest paid.
5. Existing savers can earn more
If you already have money in savings but are disappointed with the rate of interest you are earning, you may be able to get a better return in a fixed rate savings account, also often called a fixed rate bond.
As the name suggests, fixed-rate bonds pay a set amount of interest for a certain period of time - terms range from one to five years.
This type of account only suits those who already have savings, as you can only make one deposit at the time the account is opened. Also, you must be able to afford to lock your money away as you can't usually access your savings during the fixed term, so while a five-year fixed-rate bond may offer the highest return, it won't be the best option if you may need access to your savings before then. You need to think carefully about how long you're prepared to lock your money away for.
6. Savings interest is taxed
Income tax is payable on any interest you earn on savings. Basic rate taxpayers will lose 20% of the interest paid. Those in the higher and top rate tax bands will lose 40% and 50% respectively. Basic rate tax is deducted automatically, while 40% and 50% taxpayers declare their savings interest on their annual self-assessment form.
If you are a non-taxpayer your savings interest won't be subject to tax. However, you need to complete an R85 form to ensure your interest is paid gross. Your savings provider should be able to provide you with this form. Otherwise you can download an R85 from the HMRC website.
If your spouse is in a different tax band to you, it can be worth transferring all your savings into the name of the person who pays the lowest rate of tax.
7. Take advantage of ISAs
Each tax year you have an annual ISA allowance. Returns on ISAs - individual savings accounts - are tax free. If you are a taxpayer it is therefore well worth taking advantage of your ISA allowance.
In the current tax year, which ends on 5 April 2014, you can shelter up to £11,520 from the taxman. You can invest the entire amount in a stocks and shares ISA or split your allowance and put up to £5,760 in a cash ISA.
The stocks and shares option is riskier because your returns depend on the performance of the stock market. Cash ISAs are just like normal savings accounts, the only difference being that you don't pay tax on any interest you earn.
8. Consider shares if you are investing for the long term
Investing in the stock market is higher risk than keeping your savings in cash, but over the long term shares tend to perform better. Financial advisers recommend considering stock market investments if you are saving for more than five years - maybe you're investing for your child's education or your own retirement.
Collective funds such as unit trusts and open-ended investment companies help mitigate some of the risk because your money will be spread between shares in a number of companies - usually 80 to 100. This is probably the best place to start if you are a novice investor. There are literally thousands of funds to choose from though so it's worth doing a bit of research first - there is plenty of information online. Alternatively, seek help from an independent financial adviser.
9. Be careful if you are investing for your children
Many parents want to save for their children's future. Most children aren't taxed on their savings because they don't pay income tax. However, if you put save money in your son or daughter's name and it earns more than £100 interest a year, it will be liable to tax as it is classed as the parent's. This is to stop wealthy families from putting money in their children's names to avoid tax. It only applies to parents though - grandparents, friends and other family members can save for your children.
It is possible to invest up to £3,720 a year for your child tax free. If they were born before September 1 2002 or after 3 January 2011 they qualify for a Junior ISA. If they were born between those dates they will have a Child Trust Fund
10. Ensure your savings are protected
The first £85,000 of cash savings held with an individual institution is totally protected under the terms of the Financial Services Compensation Scheme. The protection is £170,000 if the account is in joint names. For most people this will be more than enough.
However, if you are fortunate to have more than that in cash savings, it worth spreading your money around between different providers to ensure it is all protected in the event of the bank or building society going bust.
Bear in mind that some savings brands share the same banking licence so you may not have the protection you need even if you split your money between accounts. For example, Halifax, Bank of Scotland, Intelligent Finance Birmingham Midshires and the AA are all part of the same group. So if you have a Halifax account and a Birmingham Midshires Account, only £85,000 is protected.
However, if you have a savings account with Halifax and another with Santander £170,000 would be protected (£340,000 if the accounts were in joint names) because they have separate banking licences.
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