Savings Accounts – What Are Your Options?

Whether times are good or bad, deciding where to place that little nest egg of savings is never easy.

There are usually two primary considerations that most savers try to balance – the safety and security of their savings versus the return (earnings) on them.

In this marketplace the offerings and conditions change almost daily so research will always be necessary and it is highly advisable to consult a duly qualified and registered independent expert before making any decisions. There are though a few general points to consider at the start.

High variable returns – high risk.

Some potential locations for savings offer an uncertain future. The returns are not guaranteed and the value of the savings can go down as well as up. Against this if things ‘go well’ than the earnings and growth of the nest egg can be spectacular.

Examples of this type of saving and investment would be standard stocks and shares portfolios, non-government backed private bonds, currency trading linked savings and commodities based products that bet upon oil or gold prices etc.

In these types of savings and investment schemes, the ‘nest egg’ may rise in value consistently, it may go up-and-down, or it may decline dramatically to near zero and be entirely lost. Schemes of this nature typically may be better suited to corporate entities or very wealthy individuals – they may be seen as too risky for the average saver/investor.

Moderate level returns – balanced risk.

Some products offer the possibility of higher returns without putting the entire savings at risk. These usually involve the saver/investor passing the savings to a brokerage company and specifying which percentages of it are to be invested where. It may be, as an example, that 50% of the fund is invested in government-backed bonds that guarantee a return of ‘x’ percent after several years. The other 50% could be split 25% going to a fixed interest guaranteed scheme and the remaining 25% used to play the riskier stocks and shares markets.

In these schemes the investor minimises their risks of total catastrophe but are prepared to take higher risks with a small percentage to hopefully achieve higher gains.

Once again these schemes tend to be normally utilised by people with larger sums to invest and who are prepared to spend time monitoring the performance of their savings in the various marketplaces.

Specified level returns – lower to zero risk.

For the majority of ordinary savers and investors, the idea of gambling with all or part of their savings may prove too intimidating to contemplate. To achieve a reasonable rate of return on their funds with minimal risk means that they will probably be looking at one of a range of more conventional savings products.

• Tax-Free savings with guaranteed returns. Examples of this include ISAs where a lump sum is invested for a specified period and often a fixed percentage or minimum percentage profit is guaranteed. The savings may not be accessible in full ahead of the maturity period without incurring tax penalties.
• Fixed rate ‘notice period accounts’. In these products the savings are deposited into a savings account and usually receive preferential interest rates because the money cannot be withdrawn by the saver without giving 30, 60 or 90 days notice to the bank or building society.
• Instant Access Savings Accounts - these also offer preferential interest rates but with immediate access to the savings if they are needed.
• Bonds. It is possible to purchase bonds through banks, building societies and brokers. If these are government backed with a guaranteed interest payment at maturity (say 5 years) they may be described as ‘GILTS’. It is worth noting that not all bonds are government backed or totally secure.
• Premium bonds. These offer no interest at all but the money is safe and there is a chance of winning a significant sum tax-free.

As always, research and advice will highlight a vast number of options but always be sure that the position is totally understood from a risk, guarantee and potential return viewpoint before depositing those precious savings!

• Savings can be used to earn money and grow the ‘nest egg’
• Some savings and investment areas offer potential high returns but are also high-risk.
• Savings schemes can be found that are a mixture of guaranteed and riskier investments.
• Many standard savings schemes offer specified levels of growth with little if any risk to the funds.

Introduction to savings accounts

Any introduction to savings accounts these days is going to make quite sombre and gloomy reading. This reason for this can be pinned quite squarely on the recent drastic reductions in the Bank of England base rate, which has plunged to its lowest ever. And it is that rate, of course, which determines the interest rate not only paid by borrowers, but also that received by savers. The current rate might be potentially good news for borrowers, therefore, but it is far less so for savers.

Figures released by the Bank of England and published in the Guardian newspaper on the 12th of January 2009, for example, revealed that the rates of interest currently available on most forms of saving account is less than 1%.

With the base rate at an all-time low of 1.5%, of course, such poor returns on savings accounts has to be expected. Nevertheless, the overall shortage of funds available for lending counts to the savers’ advantage because it means that banks and building societies are practically desperate for cash deposits. Although it might not seem like it, therefore, there remains quite keen competition amongst such deposit-takers for savers’ funds.

Not only are banks and building societies keen to attract cash savings, they are especially eager to attract longer-term rather than short-term deposits. The rates of interest offered on notice accounts – where advance notice of an intended withdrawal of anything between 30 and 90 days is required – remain slightly higher than the rates offered on instant access savings accounts. If you are able to tie your money up for at least as long as the period of notice allows, therefore, it should be possible to secure a better rate of interest on your savings. Nevertheless, the low rate of the underlying interest rate is eroding the wide differences between rates offered on notice, compared to instant access, savings accounts that would have been apparent a year ago, for example.

Slightly higher interest rates again should still be available if you are in a position to tie up your savings for a still longer period of time in a savings bond. A bond is effectively your loan to the deposit-taker for a fixed period, at a given rate of interest, and at the end of which period, you will receive back the money you initially lent, plus any interest earned on the loan. Once the bond has been purchased, therefore, there is generally no provision for you to gain access to those savings by redeeming the bond early and it will be necessary to wait until the agreed maturity of the bond. Because the deposit-taker has your money for longer and the more or less certain knowledge that you will not be able to reclaim it before the maturity date of the bond, this form of saving generally represents the highest rate of interest available.

The net value of any savings, however, also need to take into account any income tax that has to be paid on the earnings and no introduction to savings accounts would be complete without reference to the Individual Savings Account, or ISA. This represents a way of enjoying tax free income from savings up to the maximum permitted in an ISA of £3,600. The tax-free incentive, moreover, has the potential for turning an otherwise unattractive rate of return on your savings into one that is at least inflation-proof.