All about investment

By Tim Bennett

First the bad news – none of us are saving enough money. In the US last year the proportion of household income stashed away, known as the “savings ratio” plummeted to a level last seen during the Great Depression. In a recent survey, Sainsbury’s revealed that in the UK, one in five people claim not to have enough saved to last even a month if they lost their jobs and 12% of us have no cash savings at all. In fairness some would argue that with interest rates hitting rock bottom over the last five years no one, on either side of the Atlantic, has had much of an incentive to squirrel money away. However times are now changing - the UK base rate has risen sharply in the last 12 months and banks and building societies have, in most cases, responded by offering some pretty juicy savings rates. In any event it makes sense to have the equivalent of at least three months gross salary tucked away just in case. After all no one knows what lies around the corner – redundancy, marriage, an accident or just some time off. All a lot easier to deal with if you have a savings buffer. Given the vast number of savings accounts around, what features should you look for?

A decent interest rate

As a rule of thumb, if a bank’s savings account isn’t paying at least the Bank of England base rate then sign up with someone else because there is plenty of choice. The best rates tend to be for accounts operated either over the internet or by post as this saves the provider administration costs. Also, if you are aged 50 or above make sure you are getting the slightly enhanced rates often available for “silver savers”. At moneysupermarket.com you can compare rates at a glance. Having opened an account, it pays to monitor the interest rate periodically as some banks offer a great introductory deal but don’t then keep up with competitors as the base rate rises. Also watch out for hidden interest penalties for making multiple withdrawals - even on an instant access account, some providers will dock that month’s interest for example.

Flexibility

The point about saving is easy access – why set up an emergency fund that you can’t access for say three months? Although you may (though this is by no means guaranteed) get a little more interest on a notice account or a fixed term deposit there are often penalties for making withdrawals and we think the extra flexibility of being able to get to your money immediately, with a “no notice” account, more than compensates. The other problem with fixed rate accounts is that if interest rates rise while your money is locked away you won’t be able to take advantage.

Tax efficiency

Make sure that you use your individual savings account allowance, as the money earned is tax free up to the government’s limit – currently £3,000 per year - whereas interest in a normal account is taxed. Again, shop around as there are many Isa providers and interest rates and charges on these accounts can vary.

Offsetting – do your homework

Given that many budding savers also have mortgages, an account that lets you offset any balance in your savings account against your mortgage can look tempting and save some tax. The idea is that say you had £10 of savings and a £100 mortgage, with this type of account you would only get charged mortgage interest on the net balance of £90. Whether this is a good idea depends on several things – the offset mortgage rate you pay may be higher than for a standard mortgage for example, and the savings rate you could achieve somewhere else might be better too. Nonetheless worth investigating.