A guide to saving in 2021
Savers have been at the receiving end of rate cuts and product culls in 2020. But if you’re looking to maximise the interest on your cash or have a specific financial goal, here are 10 things to consider…
Easy access vs fixed rate and notice accounts
Easy or instant access savings accounts allow you to deposit and withdraw money whenever you like, without penalty. They are handy for emergency funds but if you have any extra cash, it’s worth considering a fixed rate or notice account, which typically pay higher rates of interest.
Fixed rate and notice accounts require you to tie-up your money for a period of time or give your provider advance warning when you want to make a withdrawal. This is why they tend to offer higher rates.
Easy access accounts may have restrictions
Despite their name, a number of easy access accounts actually come with withdrawal restrictions so it’s essential to read the small print and not assume you’ll have instant access to your cash, particularly in this uncertain and low saving rate environment.
For example, Aldermore’s double access account pays 0.60%. If savers make more than two withdrawals in a year, the rate drops to 0.10%.
Diarise to move cash if a deal has an introductory bonus
A number of deals come with an introductory bonus meaning the rate will suddenly drop after a period of time.
For example, The Nationwide FlexDirect current account pays 2% AER on balances up to £1,500. However, this rate drops to 0.25% AER after the first 12 months or if a minimum £1,000 isn’t deposited into the account each month.
Always jot down when you opened the account and when the introductory bonus ends and be mindful of the T&Cs. That way you know when to check the market to find the next best deal.
Set up a linked or regular savings account
Banks try to entice prospective current account customers with a linked or regular savings account. These are savings accounts available exclusively to a bank’s current account customer base.
Linked accounts have seen their rates fall with HSBC and First Direct slashing the rate from 2.75% to 1%.
However, savers can get 3.04% AER (variable) with NatWest or RBS on monthly deposits up to £50, so they may not be suitable for those with large amounts to save.
Don’t forget ISAs
One way to shield your money from the tax man is through an ISA (Individual Savings Account), which is tax free year after year.
However, the introduction of the Personal Savings Allowance in April 2016 took the majority of people out of paying tax on interest earned and as a result, the cash ISA market lost its lustre.
The PSA offers basic rate taxpayers the ability to earn up to £1,000 savings income (£500 for higher rate taxpayers), free from tax. Additional rate taxpayers aren’t eligible for the tax break.
But you shouldn’t discount ISAs; they remain tax-free regardless of the interest rate applicable and the amount held.
They also don’t count towards the PSA, so they can be held in addition. This could prove extremely valuable if savers are likely to go above the threshold or for additional rate taxpayers who don’t get a PSA.
Round up your spare change
Some accounts automatically pull in your spare change, taking away the chore of having to actively save your money.
Digital banks Monzo, Starling and Tandem automatically round up purchases to the nearest pound and transfer the spare change into a savings account.
A number of high street banks have also caught on to this feature while the Moneybox app also automatically rounds up spending. But the extra money is transferred into an investment account, rather than a savings account.
Consider Premium Bonds
Often considered a more fun way of saving, Premium Bonds, administered by National Savings & Investments (NS&I), are held by more than 20 million people in the UK.
They aren’t like normal savings accounts as they don’t pay interest. Instead the interest that should be paid (currently 1%) is used to fund a monthly prize draw with savers given a chance to scoop the £1m jackpot.
The odds of winning for each £1 bond number is 34,500 to one. Savers can hold between £25 and £50,000 and all winnings are tax-free. Another big bonus is that the savings scheme is backed by the government so your money is 100% safe.
Consider a Lifetime ISA if you’re saving for a first home or retirement
The Lifetime ISA is a government savings scheme aimed at first-time buyers and pension savers.
Launched in April 2017, its aim is to help people aged 18-39 save for their first home or retirement. Up to £4,000 each tax year can be put away towards a property or pension and the amount receives a government bonus of 25% (up to £1,000 a year).
The funds can be withdrawn free of charge once the account holder buys their first home or reaches the age of 60.
Any other withdrawals are usually subject to a 25% penalty charge on the whole amount so savers would get back less than they put in. But due to the exceptional coronavirus circumstances, the government announced that people who’ve suffered financially as a result of the pandemic and who may want to access their funds won’t be hit by an additional withdrawal penalty. Until 5 April 2021, savers will get back all the money they originally deposited, though the amount will be subject to investment losses on stocks and shares ISAs.
There are a number of cash and ISA LISA providers, including Moneybox, Newcastle Building Society, Nottingham Building Society, Paragon Bank and Skipton Building Society, AJ Bell, Hargreaves Lansdown, Nutmeg and The Share Centre to name a few.
Consider Sharia savings, they’re not just for Muslims
Sharia savings products have given traditional products a run for their money in the past few years, often topping the best buy tables.
Under Islamic principles, savers are forbidden from earning interest or profit. Sharia-compliant products and accounts pay an expected or anticipated profit rate instead.
As well as competitive returns, they also appeal to the more ethical saver or investor as money isn’t used to fund businesses that engage in ‘unethical activities’ such as alcohol, tobacco, gambling or pornography.
However, check whether your money will be protected under the Financial Services Compensation Scheme (FSCS) which protects deposits up to £85,000 should anything go wrong.
Don’t forget Help to Save
The government-backed Help to Save scheme is aimed at low income families, particularly those in receipt of Tax Credits and Universal Credit.
For every £1 saved, the government tops up the savings with 50p. The maximum that can be saved is £2,400 over a four-year period, meaning the government will add up to £1,200 to the amount.
With the pandemic causing many to lose their jobs and claim Universal Credit for the first time, many more will be eligible to open a Help to Save account.
One more….for the kids
You may be starting your savings journey or topping up your amounts, but if you have children, don’t forget you can save for their future too.
There are a range of children’s cash savings accounts (paying up to 3.5% – Halifax, Dudley, Barclays) and Junior ISA accounts (paying up to 2.95% – Coventry Building Society), or you could invest in the stock market for potentially higher returns.
Children can also have Premium Bonds, giving them the opportunity to become a millionaire. You can even set up a pension for your child so they won’t be able to access the funds until they’re at least 57.