Guide to Saving
Britons have become a nation of spenders, not savers. One in four families is now more than £1,000 in debt, according to a report by the Institute of Fiscal Studies. Savings, meanwhile, are at an all time low. But saving does matter, and you should be doing it. Historically low interest rates have helped to cut the savings habit as good returns on your cash have been difficult to find. But everyone needs an emergency savings fund to cope with the unexpected. Life is full of weddings, holiday plans, or simply rainy day spending. It is much more sensible and less stressful to save regularly than have to borrow money to fund the unexpected. And of course it’s cheaper.
What am I saving for?
You need to identify priorities. Experts say you should aim to have a minimum of three months' net salary put aside for emergencies, such as losing your job. If you can't afford this much, then save as much as you can afford. There are plenty of accounts that allow you to save a small amount each month. You’ll be surprised how quickly the money will grow to something substantial.
Where should I put my money?
If you want no risk and instant access to your money, high street banks, building societies, Internet banks and even supermarkets all offer savings accounts. The best savings accounts give you the highest percentage rate of return on your savings. This is called the AER (annual equivalent rate) and illustrates the interest rate if it was paid and compounded each year. Avoid accounts that have long notice periods or penalties for withdrawing your money. What suits you will vary with your circumstances, but it really pays to shop around. Compare different types of savings account to find the most flexible accounts and those paying the highest interest rates. In recent years these have tended to be internet-based accounts. Traditional bank and building society based accounts tend to give a worse deal.
What about tax?
Non-taxpayers don't need to pay tax on the interest they earn on their savings. Banks and building societies normally deduct tax - 20% for basic rate taxpayers and 40% for higher rate payers - from your interest before adding it to your account. So if you are a non-taxpayer you should fill in form R85 - available from banks, building societies and tax offices - then you will receive your interest gross. When comparing savings rates, non-taxpayers should look at gross rates of interest as this is the amount they will be entitled to. So if a cash ISA is offering 6% and a standard savings account is offering 7%, the latter will be the best deal for a non-taxpayer.
Can I avoid tax on my savings?
Yes. In a bid to encourage people to save, the Government set up Individual Savings Accounts (ISAs) in 1999, which allow you to save up to £3,000 a year tax-free. If you are a higher rate taxpayer in particular, you are instantly saving 40% more. You can own one cash mini ISA in any one year. Withdrawals may be made without loss of tax relief, but once the maximum amount has been deposited into the account in a year no further deposits will be allowed that year, regardless of how much is withdrawn. You can switch your Cash ISA to other companies offering higher interest rates without penalty. Check out our list of links to leading ISA providers to keep abreast of the best deals.
Any tricks I need to be aware of?
The savings account market is competitive. Companies often open a new account paying a high rate of interest and advertise it heavily, only to drop the rate quietly later. Your money can languish earning next to nothing. Keep a regular check on the interest rate of your account, and if you see a better offer – switch.