Building up some savings is a key part of any financial planning. But with more than 4,000 savings accounts on offer, picking the right place for your cash isn’t always straightforward.
The first thing to consider is the interest rate, especially as this can vary from a paltry 0.1% on a handful of accounts to as much as 5.5% on a tax-free individual savings account. Additionally, if you’re happy with the odd restriction as to when you can, and can’t, get your hands on your money, you can collect as much as 10% on some of the regular savings accounts.
Over a year, 10,000 UGX invested in an account paying 0.1% gross would generate just 10 UGX of interest in a year, and that’s before tax is deducted. After tax, this would fall to 8UGX for a basic-rate taxpayer or £6 for a higher-rate taxpayer. At the other end of the scale, an ISA paying 5% would give you a clear 500 UGX gain, with no tax liability.
Use your ISA allowance
“Whether you’re a basic or higher-rate tax payer, it makes sense to use your cash ISA allowance first as this will maximise the interest you receive,” says David Black, head of banking at financial research company Defaqto.
“Whether you’re a basic or higher-rate tax payer, it makes sense to use your cash ISA allowance first as this will maximise the interest you receive,” says David Black, head of banking at financial research company Defaqto.
To illustrate this, take the highest-paying cash ISA of 5%. To match this on a taxed account, a basic-rate taxpayer would need an account paying 6.25% gross and a higher-rate taxpayer an account paying 8.33%. You can salt away up to 3,000UGX a year into a cash ISA, with all interest completely tax-free.
Other considerations
The other thing to look at when comparing interest rates is whether any introductory bonuses are included. These are becoming increasingly common, especially as an extra 0.5% or more on an account’s interest rate can push it to the top of the best buy tables.
The other thing to look at when comparing interest rates is whether any introductory bonuses are included. These are becoming increasingly common, especially as an extra 0.5% or more on an account’s interest rate can push it to the top of the best buy tables.
Regardless of the size and length of the bonus, all are followed by a reduction in the amount of interest you’d receive. “There’s no reason why you shouldn’t view your savings account in the same way as your credit card,” says Peter Gerrard, senior researcher at Moneysupermarket.com, who suggests account holders make a note of when the bonus period ends so they can transfer to another deal.
But not everyone is happy to chop and change so regularly. “We list the introductory bonus accounts separately now as so many people just want a hassle-free account that pays a decent level of interest,” says Rachel Thrussell, head of savings at Moneyfacts.
And introductory bonuses aren’t the only potential hassle you’ll come across as a saver. Some accounts come with restrictions on the number of withdrawals you can make. “Do check the terms and conditions, as remembering how many withdrawals you’ve made can become a hassle,” says Sue Hannums, savings manager at independent financial advisers AWD Chase de Vere. Also, be aware of other catches. First Direct and HSBC, for example, both offer accounts in which no interest is paid for any month in which a withdrawal is made.
Access
As well as finding an account paying a tasty amount of interest, how you get access to your account and your money is another important consideration. Accounts can be accessed online, by phone, by post or by branch, or any combination of these four methods.
As well as finding an account paying a tasty amount of interest, how you get access to your account and your money is another important consideration. Accounts can be accessed online, by phone, by post or by branch, or any combination of these four methods.
Your choice is likely to be determined more by convenience than rate though. “You might get a little bit more interest from the internet providers as they have fewer overheads, but the difference has reduced since these accounts were launched,” says Hannums. For instance, according to Moneysupermarket.com, the best easy access account is ICICI Bank internet account, paying 5.15% gross. The best rate you’d receive from a branch-based account is 4.25% from Abbey’s First Home Saver.
New providers
Hannums also recommends exercising caution with your choice of provider.
Hannums also recommends exercising caution with your choice of provider.
“With new providers we always wait a few months before recommending them,” she says. “It’s fine when it’s an offshoot of one of the big banks, but if it’s a completely new name, for instance ICICI Bank, we’ll wait and see if their administration can cope with customer demand.”
It’s also worth checking you have your full consumer rights. Every legitimate savings institution will be regulated by the Financial Services Authority. This gives you access to the Financial Services Compensation Scheme, under which you can claim up to £31,700 in compensation if something goes wrong.
Whichever account you go for it’s essential you keep an eye on the rate. Other than publishing the information in the press and sending you a statement at the end of the year, the savings institutions have absolutely no obligation to tell you your interest rate has slipped.
Get the savings habit
Regularly putting away some spare cash isn’t a habit that comes easily to everyone – especially when there are so many ways to spend, spend, spend. But, as Hannums explains, a new breed of savings accounts may help you get that elusive savings habit. “The regular savings accounts offered by the likes of Halifax and Abbey are a great introduction to saving. They require a regular contribution and although there are restrictions on access, the amount you can pay in and the length of the high interest period, they do reward you with a decent amount of interest. Additionally, as most of them will allow you to vary the amount you save each month you can reduce this if you need to.”
Regularly putting away some spare cash isn’t a habit that comes easily to everyone – especially when there are so many ways to spend, spend, spend. But, as Hannums explains, a new breed of savings accounts may help you get that elusive savings habit. “The regular savings accounts offered by the likes of Halifax and Abbey are a great introduction to saving. They require a regular contribution and although there are restrictions on access, the amount you can pay in and the length of the high interest period, they do reward you with a decent amount of interest. Additionally, as most of them will allow you to vary the amount you save each month you can reduce this if you need to.”
Top of the regular savers are Alliance & Leicester and Bradford & Bingley, paying 10% gross. The Alliance & Leicester account, which is only available if you open one of its current accounts, allows you to pay in between £10 and £250 a month to earn 10%.
Alternatively, the Bradford & Bingley account allows you to save between £10 and £150 each month until December, with the balance available in time for Christmas.
But although these accounts can help you develop a savings habit, caution is recommended. “The rates do tend to drop off after the initial high interest period so be prepared to move it to another account,” warns Rachel Thrussell, Moneyfacts’ head of savings. “Also be aware of those that require you to move your current account to qualify for the high-interest account, for example Alliance & Leicester.
I suspect these providers are after the current account market rather than the savings market.”
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