How to start saving
Perhaps you have decided now is the time to start saving, but are you a little clueless as to where you should start? Making sure you’ve got your money in the right types of savings account is more important than ever, as whilst all savings interest is now paid without tax, the rates are lower than they have ever been. Guarantor Loan Comparison takes a look at how it all works, whether it be a bank account, regular saver or an ISA.
Do you want to save or invest?
One of the most important questions you need to ask yourself prior to getting down to saving money is to figure out whether you want to save (ie. you put money away and you get it back with interest, without risking losing some cash or interest) or to invest (this where you may end up losing money, but you also have the potential for the cash to grow at a faster rate.
Both have their advantages, it simply comes down to your own personal circumstances and what your preferences are. On one hand, investing will typically outperform savings. However, there is an element of risk involved, and there is no guarantee you will get high returns. In fact, you could end up losing more money than you had to begin with. As a result, if you simply cannot afford to lose any cash then choosing to save may be the best bet for you.
Are your savings safe?
Of course, if you are starting to save money, you will want to make sure that your money is safe. After all, you don’t want to end up losing your savings when the entire point is to accumulate money.
It is vital that you make sure that your money is in a UK-regulated bank or building society account. This is because it means that your savings will be protected under the Financial Services Compensation Scheme. This means that if a bank was to go bust, you would receive the first £85,000 you had saved, and this is guaranteed. If you know you will have savings above this amount, it may be wise to spread your savings across different accounts for peace of mind.
Lifetime ISAs that were launched in April 2017 is one possible saving option for you if you are aged between 18 to 39. You have the potential to put up to £4,000 each tax year into these types of ISAs, and this can be in instalments or as one lump sum. The government then adds an extra 25%. That means that if you put away £1,000, you will end up having £1,250.
Help to Buy ISAs
Launched in December 2015, Help to Buy ISAs are only for first-time buyers. This means that anyone who is over the age of 16, and has never previously owned a home, or thinks they may want to get one in the future can open an account. This type of ISA works in a very similar way to Lifetime ISAs in the sense that the government also puts in an additional 25% on top of whatever you have saved.
One thing to remember is that it is not possible to save as much with this kind of ISA compared to the Lifetime ISA. You have the chance to get a bonus of a maximum of £3,000 which is considerably less than what you could potentially save with the Lifetime ISA, which is a maximum of £32,000.
However, it is important to note that you don’t necessarily have to choose between the two: it is, in fact, possible to have both a Lifetime ISA and a Help to Buy ISA. But there is one caveat: you are not able to get a bonus on the two.
If it happens to be the case that you do not fit the eligibility criteria for a Lifetime ISA or a Help to Buy ISA, then you should have a look at certain bank accounts to put your savings in. In recent years, some bank accounts’ in-credit rates have a better deal than some ISAs and savings accounts available.
Fixed-rate cash ISAs
A cash ISA is simply a savings account where the interest you accumulate isn’t taxed (so this means you keep all of the money). To open a fixed-rate cash ISA in the UK you will need to be over the age of 16. It is possible to put in up to £20,000 into one of these accounts each tax year (that is from April 6 until April 5 the following year). Once you have put this money in, it will remain tax-free each year after that.
What makes fixed-rate cash ISAs different to normal savings? The great thing about these type of account is that you are still able to access the cash within the term. Nevertheless, if you do this, you need to remember that you may potentially end up losing interest as a penalty for withdrawing early.
Easy-cash access ISAs
If you know that there is a strong chance that you will need to withdraw cash from your savings, then you should look at opting for an easy-cash access ISAs. This means that you have the freedom to withdraw cash without having to worry about losing interest or having to pay a penalty.
Want to put away savings for your child? Then consider setting up a junior ISA for them. These remain permanently tax-free and will be locked away until your child reaches the age of 18. At this point, the account becomes theirs and it turns into a standard ISA. It is possible to put up to £4,260 into a junior ISA each tax year.