What are savings rates?

Today there are now so many different saving accounts around that this may lead to intimidation and confusion – particularly with respect to the savings rates offered.

That’s a pity because the basic position is relatively simple.

Although no brief article can explain all the options in-depth, let’s look at these basics.

The current account

This is the most familiar form of bank account and relates to our day-to-day banking and bill paying etc.

Any interest payable on the positive balance in such an account is typically minimal.

That’s because the bank typically can’t predict how the money is going to move and the balance on many such accounts goes up-and-down very quickly as people want instant access to their money.

The conventional savings account

This form of account may not have a chequebook or debit card.

It is typically an account where you deposit money, perhaps regularly, with the intention of not touching it and allowing your savings to grow.

As this makes the position a little more stable and predictable for the banks, they typically reward this by offering higher savings rates (interest rates are often referred to as the APR or AER).

Typically a regular savings plan (e.g. fixed monthly deposits) as opposed to random deposits may also attract a slightly better rate.

These accounts may offer instant unrestricted access to your savings.

The notice account

Some savings accounts (often called notice accounts) don’t allow instant access to your savings.

You can only withdraw your money by giving the bank a pre-agreed notice period of perhaps 30, 60 or 90 days.  The longer notice period you agree, the greater the predictability for the bank so the higher the interest rate will typically be.

Accessing your funds outside of the agreed notice period may incur charges or a penalty (such as no interest being paid for a set period of time).

Some types of notice account allow some free withdrawals per annum up to specified levels.

The ISA (Individual Savings Account)

This is a savings scheme that allows you to save up to a specified amount per annum and all interest paid is entirely free of tax (unlike in standard savings accounts where the interest may be taxable depending on your own circumstances).

Summary

The savings rates payable on your funds will vary depending upon the savings product you choose and the provider.  

The cash ISA – how it works

The cash ISA (ISA stands for Individual Savings Account) is basically a way to save money that’s potentially tax advantageous.

How did it come about?

Governments, Tax and Savings

Governments, irrespective of their political views, often get stuck in a complete mess between the conflicting needs to tax people while at the same time trying to encourage responsible saving.

Clearly, some people will be less inclined to save if the taxman is siphoning off some of the interest they earn.

Some years ago the government became concerned that things were getting a little out-of-balance and people needed to be given an additional incentive to save.

The ISA was born!

The basics

There are two main types of ISA – the cash ISA and the stocks and shares ISA.

As this article concentrates on the cash product, we’ll say no more about stocks and shares ISAs other than they too offer potential tax advantages.

The cash product works very simply:

• you deposit money into an ISA;
• the maximum amount you can deposit per annum is specified by government legislation – as that changes periodically, it’s necessary to check the current amounts;
• any interest you earn on your ISA is tax-free, unlike standard savings accounts where the interest paid is taxable;
• if you do not use the maximum amount allowable in a given year, you can’t carry forward any unused amounts to the following year;
• as your savings accumulate, they all remain tax-free.

It’s a simple as that – and potentially a great way to keep the taxman’s hands off at least some of your money.

ISA myths

• the government decides how much interest you’ll earn – no, that is done by the company offering the ISA and it’s possible to get some ISAs that offer far better interest rates than others
• you can’t get your money out – false, some providers offer instant-access ISAs and others may have notice period requirements before money can be withdrawn, typically notice period accounts offer slightly better interest rates;
• ISAs are for rich people – wrong, the ISA limits for maximum amounts deposited are relatively low and in general, the ISA was constructed to let people of normal income levels save money;
• the ISA is a complicated product – incorrect, the basic process behind the ISA is extraordinarily simple and easy to use.

Cash ISA providers

There is a wide range of options now available in terms of sourcing an ISA.  

Providers typically offer a wide variety of interest rates and access methods and it may pay to shop around until you find one that’s suitable for you.

Remember, if you do put your money into a restricted access account, you may get a preferential rate of interest but if you need to take money out urgently you may find delays and possibly high penalty charges.  These are typically clearly outlined as part of the ISA opening process.

So, if you’re thinking about a cash ISA – have a good look around!

Taking out an ISA

The ISA (Individual Savings Account) has been around quite a while now.

It’s familiar to many, yet surprisingly some people overlook it when they’re thinking about what to do with their savings.

Let’s have a quick overview of its potential.

Encouraging saving through tax breaks

Successive governments have tried over decades to encourage savings by allowing savings product providers to offer certain products that will grow your funds on a tax-free basis.

The basic principle is that:

• generally, any profits or growth on your savings would be taxable;
• some products can offer growth that is essentially tax-free providing certain conditions are met.

The mechanics

Individual savings accounts come into two categories often called:

• stocks and shares based;
• cash based.

The simpler of the two to describe is the cash one.

You only have to deposit money into the account and any earnings will be tax-free.

The government does specify the maximum amount that you can put into this type of account in a given tax year. However, past years accounts can continue to grow tax-free.

The stocks and shares option is slightly more complicated and basically means that you can group a number of investment portfolios under the tax-free umbrella of one of these types of accounts.

Taking advice

The growth rate on these accounts is, of course, something defined by the individual account provider. It’s not the government that decides what rate you’ll get – they only define the levels that can be saved in a given year.

That’s why you’ll typically see noticeable variations in terms of the rates offered by different companies and account providers.

If you are considering engaging in stocks and shares trading while using one of these accounts as a tax saving mechanism, it’s typically good idea to take advice before starting unless you are experienced in trading in these markets.

The ISA is an interesting product that may help keep some of your money out of the taxman’s pocket!

ISA’s – Making Use of Your Tax Free Savings Allowance

Most people are vaguely aware of the fact that they can save some money on a tax free basis every year, some would even be able to tell you that it can be done through something called and Individual Savings Account (ISA). It is the case however that relatively few people make use of ISA’s as an investment vehicle. Part of the reason for this can perhaps be found in the fact that ISA’s are traditionally seen as quite complex and difficult to manage. The UK government tried to address this by overhauling the rules governing ISA’s, with new rules coming into effect in April 2008. The purpose of this short article is to briefly explain how ISA’s work and what the implications of the new ISA rules are for new investors.

Under the ISA scheme an individual can invest up to £7200 per tax year on a tax free basis. There are two way of doing this, they are:

Cash ISA’s: Cash ISA’s are, as the name suggest, simply cash amounts that are saved under the scheme. The most important thing to remember is that there is a contribution limit of £3600 per tax year if you choose to invest in a Cash ISA.

Stocks and Shares ISA’s: With this type of ISA investors invest in the stock market, usually through some form of managed investment fund. The limit for investment is the full £7200 ISA allowance. It should be noted that the amount that you can put in this type of ISA will be directly affected by how much you have already placed in a Cash ISA. If, for example, you invested £2000 in a Cash ISA, you can only invest a further £5200 in a ‘Stocks and Shares ISA.

You can invest your funds in a Cash ISA, in a Stock and Shares ISA, or a combination of both. If you want to make full use of your Cash ISA allowance and also invest your full ISA allowance (£7200) it will of course have to be a combination since there is a £3600 limit on the Cash ISA.

The big question that investors often ask is whether they should go for cash or ‘stocks and shares’.

The main benefits of Cash ISA’s are dependability and security. Placing your money in a Cash ISA is comparable to putting your money in a bank savings account, but with the added benefit that any interest gained will be tax free. It is therefore the perfect place to invest money to earn interest and maximise tax savings while still having relatively easy access to your funds.

Stocks and Shares ISA’s will be invested in the stock market. Any capital gains that you make on your investment will be tax free, but you will have to keep in mind that you are exposing yourself to the ‘ups and downs’ of the market and that your investment could therefore both increase and decrease in value. Stocks ISA’s, in common with other stock market investments, should primarily be seen as a long term investment.
It is relatively easy to take out an ISA since they are offered by many banks, building societies and investment fund managers. As with all financial products you should be careful to read the small print before committing yourself. It is also always a good idea to get independent advice before making major financial decisions.

Summary:

• ISA stand for ‘Individual Savings Account’ and refers to the amount that you can save tax free every year.
• The rules governing ISA’s have recently been simplified, making it much easier to make use of this very important investment channel.
• There are two types of ISA namely ‘Cash ISA’s’ and ‘Stocks and Shares ISA’s’
• Cash ISA’s are ideal for short term financial management while shares ISA’s should be seen as long term investment vehicles.