A bank is a financial institution with which you can deposit and withdraw your funds as and when required. Banks in the UK offer various types of accounts to their citizens. Opening bank accounts are as easy as understanding how they work. Both just need a bit of patience and effort. UK citizens’ bank accounts can be classified into three types: current accounts, savings accounts and basic bank accounts. Here we answer a few most asked questions so you can make the most of your savings account.
What are Savings Accounts?
Savings accounts were made with the objective of inculcating the saving habit among the Brits. Banks made ‘saving money’ valuable in their eyes by paying interest at a certain rate on the amount a person saved. That means the more you save, the more they’ll grow. It works such that you save a part of your earnings every month. When it adds up to a sizeable amount, you can use it for purchasing the best and expensive home appliances or pay it as a deposit for your buying your own home or car.
Is Saving a Good Practice?
You can never save enough. And UK citizens know that. Savings are very handy if you suddenly fall sick or lose your job. If you’re planning to buy a house or car in the near future, it would do you good to start saving from now on. Home and car loans require to pay up at least a 20% deposit. You can then take the remaining 80% as a loan against your home or car respectively. You should be in touch with the rates and terms and conditions offered by banks and building societies. It’s the best way to make your savings accounts work hard for you. A high interest rate means your savings grow faster and fatter.
How Do I Reach My Savings Target?
Many people budget and cut down on their expenses to reach their savings target on time. These targets refer to the amount and duration of savings. If you want to save systematically, you should use a savings calculator. You just need to feed in how much you want to save each month and what the interest rate on your savings account is. It’ll give you an idea of how long it may take to reach your target. If you don’t have saving goals, you can still make more money by putting it in savings accounts offering competitive rates. The higher the rates, the quicker your savings grow so don’t forget to shop around.
Which is the Best Savings Account for me?
The term ‘best’ is subjective. A particular bank or building society may advertise a high interest rate but their terms and conditions may not suit you. There’s such a wide range of savings accounts, deciding on one may be very tough. But, if you know the basics, you can save at the right place and in the right type of savings account.
- Cash Isas:
On non-Isa savings accounts, you have to pay tax on income earned from savings interest at the standard rate of 20% or 40%. However, if you save in cash Isas (individual savings accounts) give you the benefit of tax-free interest. This means that you won’t have to pay tax on the interest you earn. These accounts count with a maximum limit beyond which you can’t save in this account. It’s currently been set at £20,000 for the fiscal year 2018-19. Your savings may consist of cash, stocks and shares, or their combination.
Easy access savings accounts are meant for “easy access”. You can withdraw your money quickly without any hassles. To facilitate this, you might get a plastic ATM card. You might also be able to transfer money online to another person. If you wish to keep some money to use at the time of emergency, it makes sense to invest in an easy-access account as you can get it out easily.
One of the pitfalls is that there’s a limit on the number of withdrawals you can make each year without losing interest. You might get the bonus interest rate for an introductory period of 12 months, after which your interest rate may fall drastically.
A notice savings account is exactly the opposite of an easy-access account. Here, you don’t have the freedom to take out your money as and when you want. You’ll have to give a 30-day, 60-day or 90-day notice to your bank before withdrawing your money. Failing to do so is likely to end in loss of interest. So it’s wise not to keep emergency money in this account. Notice savings accounts usually don’t offer the highest interest rates, so you should look for another deal if you want instant access and a high interest income.
If you open a regular savings account, you’ll have to save some money every month without fail. So there might be problems if you blew all your salary and couldn’t save a certain amount of money to put into your account. This account actually leads to disciplined savings. How many times you can withdraw in a year is fixed. So if you’ve already exceeded your limit, your money may get blocked even if you need it urgently. There are also restrictions if you want to save extra cash. The interest rates may be fixed or variable.
In case you came into a large amount of money as an inheritance or sale proceeds, you can choose to save it in fixed-rate bonds. Fixed-rate bonds are savings accounts that allow you to save your money for a fixed duration (from two to five years or more) at a fixed and higher interest rate than easy-access, notice and regular savings accounts. The longer the duration, the higher the interest rate you’ll get. However, if you want to take it out before the end of your term, you might have to pay a heavy penalty. If you’re a beginner to the saving world, you might not have so much money to save in fixed-rate accounts.
Do I have to pay tax on savings?
If you save in cash Isas, you don’t have to pay any tax on interest. But, with a non-Isas, you can take advantage of a “personal savings allowance”. For a taxpayer in the 20% tax bracket, interest upto £1,000 is tax-free, whereas, for 40% tax bracket, interest upto £500 is tax-free.
When is Interest on Savings Accounts Credited?
You can choose to receive interest either in a lump sum at the end of the year or in part every month. If you are not dependent on interest income for a living, it’s best to go for annual interest payment.