A Guide to Different Kinds of Savings Accounts
Most adults will have had a savings account in their lives. These days, any interest you accrue on your savings is now paid tax-free up to an individual’s personal savings allowance – however, rates are also hitting record lows. The type of savings account you use can affect this, so knowing more about the different kinds on offer is always a good idea.
Before starting to save, it is important to make sure you understand the difference between saving and investing. Saving entails putting money away and getting it all back plus any interest it has gathered. Investing is risking losing some interest and/or cash in the hope that your original amount will grow at a faster rate.
Lifetime ISAs or Help to Buy ISAs
Both of these types of accounts are only for first-time buyers. The Lifetime ISA (LISA) was launched in 2017 for anyone aged between 18 and 39. You can save up to 4,000/tax year into it, either as a lump sum or by putting cash in as and when you can and government then adds 25% on top. First-time buyers can use the money as part of the deposit for any residential property costing up to £450,000 once they’ve held the LISA for 12 months.
The Help to Buy ISA was launched in 2015. Anyone over 16 who has never owned a home but wishes to buy one can open one. It works similarly to a LISA, with the government adding a 25% bonus on top of your savings. However, you can’t save as much in a Help to Buy ISA as you can in a LISA and the maximum bonus is £3,000.
Regular savings account
You usually have to pay into your regular savings account every month – typically between £10 and £500. There may also be a minimum number of monthly payments with the account having a fixed term of a year. With most bank’s regular savings accounts, you will have to open a current account with them before qualifying for a regular savings account and your money will be moved to the current account once the limited term of the regular savings account ends.
Fixed-rate cash ISAs
A cash ISA is a savings account where the interest is not taxed, meaning you keep all of it. Anyone over the age of 16 in the UK can put up to £20,000 in an ISA each tax year (April 6 – April 5) and once in, it stays tax-free year after year. Unlike normal savings accounts, you can access the cash in fixed-rate cash ISAs within the term. However, you will then lose some interest in penalties.
Easy-cash access ISAs
Those who know they will need regular access to their cash should opt for an easy-access ISA. These have no withdrawal restrictions, meaning you can take out your money whenever you want it. You can always transfer old ISAs into better paying ones, but it is best not to withdraw the cash and pay it in.
Another option is a fixed-rate savings account wherein you lock away your money without access. This ensures a higher rate. However, if rates rise over the term, you cannot switch meaning you should consider things carefully before fixing for long periods.
This account has the lowest rates of all the options on this list, however you can deposit and withdraw cash at your own leisure. It is a good idea to keep an eye on the rate as it is variable and can drop.
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This article is for information only and must not be considered as financial advice. We always recommend that you seek independent financial advice before making any financial decisions. Investments can go down as well as up and you may get back less than you invested.
gpfm are an independent financial planning company dedicated to the provision of personal, professional and objective-driven advice for our clients. We have been awarded the Chartered Financial Planners title by the Chartered Insurance Institute for offering high quality, independent and informed advice that meets the needs of our clients.