Savings Article
Written by David Black, banking guru at independent research company, Defaqto, 23rd November 2006
There are lots of banks and Building Societies out there, and with many of them offering a range of savings accounts it can be a daunting task to try and select the most appropriate account. To narrow the field, decide how you wish to open and operate the account. Are you happy to use the internet, the telephone, the post or would you prefer the convenience of a branch? Do you want an account that has a cash card or a cheque book? Some accounts will permit access by a variety of these methods.
Next, think about the type of account that you want: Instant access; Easy access (easy access is sometimes referred to as ‘no notice’ and generally refers to an account which takes up to three or four days to access funds); Notice account; Monthly income; Regular savings or a fixed interest term account? Each account will stipulate a minimum opening balance and some will pay derisory rates of interest if your balance subsequently falls below this minimum.
If you’re a taxpayer, or likely to become so, make sure that you use your annual Individual Savings Account (ISA) allowance, currently £3,000 in a cash ISA (alternatively £7,000 into a stocks and shares ISA if you prefer) in each year to 5th April.
Interest on cash ISAs is paid gross and is currently tax free. It’s also worth noting that the interest rates on cash ISAs are, as a generalisation, fairly competitive in relation to other accounts for similar balances. If you’re not able to invest long term you can use a cash ISA as a transactional account in order to make some use of the tax advantage. As with normal accounts cash ISAs are available in many different guises ranging from instant access to fixed interest term accounts. Higher rate taxpayers particularly may find it useful to consider the National Savings and Investments range as some of their range, for example the Index Linked Bonds, are tax free.
Interest on non-ISA accounts is paid net of basic rate tax. Higher rate taxpayers will be liable to a further 20% income tax on the gross interest amount which will be calculated as part of the annual self assessment return.
Non-taxpayers If you’re a non-taxpayer with total income below that of your personal tax allowance, make sure that you sign an R85 form so that you can receive interest gross on any savings account. Typically this will be the case for most children.
Your bank or building society will be able to provide you with the R85 form. The hardest part of selecting an account is to make sure that you’re getting, and continue to get, the best interest rate. You’ll need to review your account against what’s available elsewhere on a regular basis, say, every six months or so. Keep an eye on the various best buy tables that appear in newspapers or on websites such as www.find.co.uk to gauge how your account is faring. Bear in mind that for a provider a mention in a best buy table is essentially free advertising and that they will often use various methods in order to appear in them. The most obvious is the use of a short term introductory bonus which will pay an enhanced ‘bonus’ rate for a period of, typically, six months or a year. By all means play the providers at their own game and use these accounts, but review your options prior to the expiry of the introductory bonus and be prepared to move your money elsewhere.
Make sure that you understand the terms of the accounts and avoid giving your provider the opportunity to levy any penalty. Time was when accounts were straightforward. Many still are. Others, however, may have various interest rate or withdrawal related restrictions. An example of this is a stipulation that you may only make three withdrawals per year without incurring any penalty: if you exceed this number of withdrawals your interest rate will plummet. Make sure that you fully understand, and are happy with, the terms of any account before you entrust it with your money. Key point: When comparing the interest rates of accounts concentrate on the gross Annual Effective Rate (AER) as this will enable you to compare accounts on a like-by-like basis because it takes account of the frequency of interest payments.
A handful of observations for you to consider: Internet based accounts will often be amongst the most competitive for instant and easy access, Notice accounts rarely pay a premium interest rate when compared to the highest paying instant or easy access account, Just because an account paid the highest rate at the time that you opened it does not mean that it will continue to do so, Make sure that a provider is authorised to take deposits in the UK by ringing the FSA consumer helpline on 0845 606 1234 or by checking the list of firms and individuals on the Banking Act list via the FSAs website at www.fsa.gov.uk, Limit your total deposit with any bank or building society to a maximum of £35,000.
Under the Financial Services Compensation Scheme, the maximum compensation payment if a bank or building society collapses is £35,000 (being 100% of the first £35,000).
Savings rates always take a few weeks to settle down after a Bank of England base rate change.