Most of us have had the virtues of savings drummed into our heads since childhood. Everyone from our parents to the financial guru on the television has lectured us about the necessity of saving for a rainy day. Yet in recent years, particularly in the wake of the Great Recession, a disturbing number of Britons reported that they had no or very little savings; in 2011 the market research consultancy Mintel found that about 22% of families admitted to having no savings at all.
But the tide seems to be turning. More recent research, conducted by National Savings & Investments in early 2015, showed that Britons are managing to put more money into savings accounts than at any time in the past decade. As well, recent data indicates that savings interest rates are edging upwards after years of record lows. That’s the good news. The bad news is that even the “easy access” accounts are becoming less easy to access, with stricter restraints being placed on how many times you can take money out of your account.
Does this mean that you’d be better off eschewing banks and just stuffing your money under a mattress? Not at all, but you do need to be aware of the advantages and disadvantages of the savings options that are available.
It’s your money (but not totally yours)
According to the web site Moneyfacts, the average interest rate on the top ten savings accounts has increased from 1.39% a year ago, to 1.48% today, so right there you have an advantage over the under-the-mattress savings plan. Though not enormous, the increase is significant and precedes an anticipated rise in the Bank of England base rate, which most analysts predict will happen in 2016. For savers who want to maximize their returns, the upward trend in rates is indeed good news.
Unfortunately for those who may need instant access to cash from their savings at any given time, providers are increasingly tightening their restrictions on withdrawals. In some cases, savers are only allowed to withdraw three times a year. Most providers make their restrictions clear to customers at the outset so the problem isn’t necessarily a lack of transparency. Even so, Moneyfacts suggests that the regulatory body, the Financial Conduct Authority (FCA), should investigate the matter. But what’s a saver to do whilst waiting for the FCA to make things better? There are several options.
One size does not fit all
The best savings solution for your 66-year-old neighbor may not be the best one for you. What is optimal for you depends upon several factors such as your age, income and financial goals.
The big savings news at the beginning of the year concerned pensioner bonds for savers 65 or over. There was a lot of hoopla about the fact that some of the bonds paid as high as 4 % and allowed joint savings of up to £40,000. But if you weren’t quick enough to get in on the scheme – they went on sale in January 2015 and closed in May – you still have options for saving your hard-earned cash. Everything from boosting your state pension to getting energy grants for your home can help make the difference between a life of struggle and an easy retirement. One advantage of being older is that you become eligible for a host of benefits, discounts and even freebies, so do your research.
If you are under 65 and have a lump sum of less than £5,000, a high interest current account might be a good choice. However you do have to make a minimum monthly deposit that can range from £500 to £1500. Other options for savings are regular savings accounts, various sorts of bonds or, for those who don’t mind taking a bit of a risk, even peer to peer lending.
Many experts suggest a cash ISA, or individual savings account, which is a tax-free savings account. This means that interest payable is exempt from UK income tax. One big advantage of the ISA is that the tax exemption is long term. Even though the rates are still quite paltry now they are sure to bounce back and when they do your interest will be much more valuable – and still tax-free.
No matter what your age, it’s important to maintain the habit of savings and not deplete that nest egg unless you truly have an emergency and no other options. (Maybe those accounts that place strict restraints on the number of withdrawals aren’t such a bad idea for some people!) If you find yourself in a bit of a rough spot, taking out a short or long term loan may be preferable to dipping into your savings. Again, do your research. And because laws and regulations are always subject to change, the information you read today may not apply next month or next year, so always consult with a properly qualified expert before making any big money decisions.