Do you keep meaning to start a savings pot but aren’t sure where - or when - to even start? In this article, we’ll discuss seven things you should know if you’re thinking of opening a savings account.
When is the best time of the year to open a savings account? And are there any particular offers you should look out for?
1. Set a savings goal
People with a savings goal save, on average, £550 more a year than those who don’t have a goal (NS&I). So, while setting one isn’t strictly necessary, it may help you save more and more quickly.
There are many types of savings accounts on the market, such as easy access accounts and ISA’s. The different types of accounts all have their own characteristics and their own pros and cons. Most importantly, not all kinds of savings accounts will be well-suited to the same goals.
Defining what your savings goals are will help you better understand your needs, making it easier to choose the best kind of account for you. If you've got an account that suits you, then it can help you reach those goals more quickly and efficiently.
2. It’s worth looking around for good interest rates. But loyalty can pay off, too
In recent years, interest rates have generally fallen across the board. But there’s still a fairly sizeable difference between the best and worst rates you can get. For this reason, it’s worth having a look at what’s out there and comparing deals from different banks.
With that being said, you may find that banks will reward customers’ loyalty.
Many banks tend to offer their most attractive interest rates on so-called ‘linked accounts’. These are accounts you can only open if you already hold a current account with that bank. Interest rates also tend to be higher if you’re a premium customer, than if you have a standard account.
However, many current accounts will require a minimum incoming monthly payment and two direct debits to be paid out of it each month. In addition, interest is usually applied only on a set amount, which means you won’t earn interest on any deposits over this limit.
3. Seems too attractive? It may be just an introductory offer
Also known as teaser rates, introductory offers use higher than average interest rates to tempt customers into opening new accounts. Unfortunately, these rates only last for a set amount of time - typically 12 months. After this period, they tend to drop dramatically.
The fact that an interest rate is an introductory offer should be made clear to you. Look out for a tell-tale asterisk next to the advertised interest rate. With this in mind, it’s a good idea to thoroughly check an offer’s terms and conditions before you sign up.
Make the most of introductory offers but bear in mind that rates can drop dramatically once the initial period is over. Keep an eye out for new deals and you may want to consider switching when the introductory offer is about to end.
4. Look out for special schemes
If you’re saving with a specific goal in mind, there may be a government scheme available to you which can help you reach your goals more quickly.
Here are two schemes you may be interested in:
These are a new type of ISA (individual savings account) that you may be eligible for if you’re saving up to buy your very first property.
After depositing a lump sum of £1,200, you save up to £200 a month into your ISA. Then, once you’re about to finalise your home purchase, you can apply for a government bonus of up to £3,000 which you can put towards your first house.
A new scheme that launched in April 2017, a lifetime ISA allows you to save up to £4,000 a year, tax-free, if you’re under 40.
You’ll also get a government bonus of £1 for every £4 of your own money you put into the ISA.
5. It’s always a good time to start saving, but...
While you can open a savings account at any time of the year, the beginning of April is usually the best time to do it. Especially if you’re planning to open an ISA (individual savings account).
An ISA allows you to earn interest on your savings tax-free. However, the amount of savings you can earn interest on without paying tax in a given year - called your ISA allowance - is capped by the government. This tax year the ISA allowance is £20,000. The tax year runs from 6th April to the following 5th April. This means you only have up to the 5th April each year in order to make the most of your allowance.
Most banks tend to face a flurry of ISA applications during the final weeks of the tax year. By opening yours as early as possible, you’ll beat the rush and give yourself a headstart on making the most of your yearly allowance.
But that’s only one piece of the puzzle.
Banks also tend to launch new deals - and new savings products - at the beginning of the new tax year. This makes April a good time to look into new offers and transfer your savings to a new account with a better rate.
You cannot carry over the unused portion of your yearly ISA allowance into the next tax year. If you don’t use it, you lose it. For this reason, you should try to use up as much of your allowance as possible each year.
This can also pay off in the long term.
Interest you earn on an ISA continues to be tax free for as long as you keep the ISA open. Even if the interest rate drops, don’t underestimate the power of small tax-free earnings accumulated over a long period of time.
Transferring an ISA won’t affect its tax-free status. However, do check your old ISA provider’s terms and conditions beforehand. You may have to pay a penalty if you transfer an ISA during a fixed term.
7. The longer you commit, the better your return
Short term savings accounts offer you easy access to your savings and allow you to make more frequent withdrawals. But they tend to have the lowest interest rates.
Alternatively you could open a more long-term savings account, which usually offer higher interest rates. As a rule of thumb, interest rates get better the longer you tie up your money. Many long term savings accounts allow only limited withdrawals or no withdrawals at all. This makes them unsuitable if you’re saving for an emergency fund or other short-term goal.
Now you know what to look for and how to get the best rates, you can make sure you open a savings account that works for you and lets you reach those saving goals.