The current economic climate is not beneficial for savers. Low interest rates and the rising cost of living make it difficult for most households to save. Careful planning can, however, help maximise the rate of return on any savings made.
The most important thing to consider when deciding where to place savings is what they will be used for. Are you saving for general retirement or are you saving up for a specific event, such as a big holiday or a wedding?
If you are saving for a particular event, then you should consider a notice account. You have to give notice of any withdrawal but in return, you get a better rate of return than an ordinary savings account.
ISAs continue to be one of the best ways to save in the UK as any interest gained is tax free. There are various types of ISA and the one you choose will reflect your needs and requirements. The section on the individual types of ISA at moneysupermarket gives more details on the different ISAs available and rates offered, but a brief summary follows.
Cash ISAs – Each year you can save an amount set by the government into a cash ISA. In the tax year 2010/11, this is £5,100. Different ISAs have different rules. Some allow you to access cash when you like. Others offer a higher rate of interest but you can’t touch the money for a year.
Some cash ISAs allow you to pay in a regular sum. Others only allow you to pay in once. Some have fixed rates and some have variable rates. It all depends on how much money you can put aside and when.
Monthly savings usually have lower rates but are easier for most people to manage. Fixed rates can seem attractive, but bear in mind that rates can vary widely over a year.
Once the tax year has ended then you get a new allowance that can usually be added to the balance of the old.
Another type of ISA is the Stocks and Shares ISA. This is more risky as your investment is tied to the performance of the stock market, which can be volatile. However, any gains made on your ISA investment are interest free.
This type of ISA is worth considering when saving long term, as historically, the stock market offers good rates of return, particularly over a long period.
For those saving specifically for retirement, there are a number of options. First and foremost is a pension fund, often available through employers. These have the advantage that employers often contribute as well.
If you are not eligible for a company pension scheme then you can still save using retirement accounts. There are different types of account available. You can put aside a regular amount monthly or an annual sum.
For those who have some money that they are prepared to tie up for a number of years, fixed rate accounts can be a good option. These are often called bonds.
In bonds or fixed rate accounts, savers have to be prepared to tie up their money for between two to five years. In general, the longer you are prepared to tie up the money, the better the interest rates.
Some accounts offer fixed interest rates but savers should remember that economic conditions can change dramatically over a period as long as five years. Therefore a fixed interest rate that seems attractive at the beginning of this period might not be so attractive at the end of the period.
The primary things to consider when you are choosing how to save are when you need access to the money and how much money you can afford to set aside. This will help you decide the type of savings account you need. You can then compare and contrast interest rates to help you make you make your final decision.