Which account to choose

Which account to choose
There are so many options now available to savers that it is difficult to know where to begin. What sort of account is best for you depends upon several factors – for example, how long you can tie your cash up for, how quickly you are likely to need access and whether you pay tax or not.

It can pay off financially to invest a small amount of time in examining how different types of account could work for you. And even if you already have a savings account, you should consider changing it. Our rundown on the different ways of saving will help you make your decision.

Instant access accounts: These are ideal for money you may need in a hurry. Your emergency fund should be in this type of account so that you can immediately meet any unexpected costs. Most instant access accounts come with a cash machine card so you can get at your money 24 hours a day. There will probably be a limit on how much you can take out but it should be enough to cope with financial emergencies. And if you need to withdraw all your cash you should be able to do so at your local branch.

The right account will normally be the one which pays the most interest but remember that while some high-interest telephone and internet-based accounts claim to offer instant access, you may have to wait a few days while a cheque is sent out or a transfer is made to your current account if you want to withdraw all your cash.

To ensure you get the best return on your savings, keep an eye on best buy tables and switch cash when necessary. It’s wise to check your rate at least every three months – use our regularly updated best buy savings tables.

		TIP: If you are moving money out of an account, leave the minimum balance in. Just £1 will usually keep an account open and that makes it easier to switch back if you want to do so in the future.

Notice accounts: Traditionally, your savings earn a better rate of interest if you agree to lock them away for some time. The trade-off is that you cannot get at your money immediately. With notice accounts, you can only get your cash by giving notice of your intention to withdraw it. For example, with a 90-day notice account you would have to wait three months to get your money. You pay a penalty to get at it earlier.

Few notice accounts look very attractive these days as instant access accounts have become much more competitive. So you rarely need to tie up your money to get the best rates.

Cash Isas: Cash Individual Savings Accounts (Isas) are savings accounts where you earn tax-free interest. However, you can only put £3,000 in a cash Isa during the 2000-2001 tax year. While cash Isas do not always offer the highest rates of interest in the savings account market, after tax you may find they beat higher-paying ordinary savings accounts (see Why tax matters).

To compare rates, look at the gross rate paid on a cash Isa with the net rate you will receive on a standard savings account. For example, a deposit account may be paying a quoted rate of 7% while a cash Isa pays just 6%. A cash Isa is tax-free but if you are a basic-rate taxpayer you will have to pay standard rate tax on interest from the deposit account – which means your real return after tax is just 5.6%. If you are a non-taxpayer then you should opt for the highest paying savings account as you are entitled to receive your interest tax-free anyway. Use our Savings Rate Converter to see how much interest you will get depending on whether you pay basic or high rate tax.

The Government has introduced CATmarking for some financial products. CATmarks on cash Isas mean:

Low Charges – there should be no one-off or regular charges of any kind. There should be no other conditions imposed such as a limit on the number of withdrawals.

Easy Access – people must be able to get at their cash within seven days and the minimum savings level should be no higher than £10.

Reasonable Terms – the interest rate earned on the cash held within the Isa should be no more than two percentage points below the prevailing base rate, in other words competitive. Interest rates must be adjusted upwards within one calendar month of a base-rate rise, so that savers enjoy higher interest rates as quickly as possible.

CATmarks are purely voluntary and Isa managers can choose whether to adhere to them, so not all Isas are CATmarked. Be wary of any cash investments that are not CATmarked, because you will have no guarantees on your interest rate. Share investments that are not CATmarked may offer potentially higher returns for higher risks so you are more likely to need independent financial advice.

If you are likely to need your money in a hurry, make sure you choose an instant access cash Isa. While CATmarked cash Isas allow you quick access to your money, some cash Isas require up to 90 days notice of any withdrawals, otherwise there is a charge of up to £50.

		TIP: Using cash Isas can save you a 20% tax bill if you are a basic rate tax payer and 40% if you are a higher rate payer. (See also INVESTMENTS – Isas)

Regular savings accounts: If you can commit yourself to making regular savings, these accounts may be for you. They often pay superior annual rates of interest. They do this by giving savers an annual bonus payable as interest on top of their interest rate. But beware, if you fail to make the required deposits you will lose the annual bonus.

Most of these accounts limit the number of withdrawals you can make each year so they aren’t much good for emergency cash but they are an ideal way of getting into the savings habit and you can start a regular savings account with as little as £5 a month.

		TIP: Only switch your regular savings account if the rate falls after you receive your annual bonus.

National Savings accounts: The Government-run National Savings department offers a range of accounts and bonds. National Savings might not offer a solution to all your savings problems but there are few safer places for your money. All products are capital secure – investors will get their money back whatever happens. Some pay returns free of all tax, others pay interest gross but savers have to declare it on their tax returns, while fixed rate savings bonds pay interest after the deduction of 20% tax, which cannot be reclaimed. Here is the full National Savings range:

Savings Certificates are perhaps the most attractive option offered by National Savings. Returns are tax-free but the certificates must be held for their full term otherwise you receive a lower interest rate.

There are two types. Index-linked certificates provide a hedge against inflation by offering a guaranteed rate of interest above the Retail Prices Index over two or five years. For example if the guaranteed rate is 2% and the rate of increase in the RPI was 5% over, say, five years, the certificate would return 7%. They are ideal for higher rate taxpayers who want to protect their money from inflation.

		TIP: If you are worried about the effects of inflation on your savings, then consider index-linked certificates. The interest rate on these is the inflation rate plus a few extra per cent. These certificates ensure you always make a real return on your savings.

Fixed-interest savings certificates have a guaranteed rate of return after two or five years. After this you can take the returns tax-free, keep the matured certificate in force or reinvest the proceeds in the current issue. They are ideal for higher rate taxpayers who want to protect their money from tax but want to know what they will receive in advance.

Capital bonds are fixed-rate investments which provide a guaranteed rate of interest as long as they are held for five years. They are for savers who want to know how much their investment will return and who can afford to tie their money up for five years without drawing an income on it. They are good when interest rates are falling as you will continue to earn the interest you were promised when you signed up. Interest is paid gross but is taxable – so taxpayers will have to declare it on tax forms.

Income bonds pay a regular monthly income and like Capital bonds, Interest is paid gross but it is taxable. The interest rates are variable and the bonds are designed for people who want to generate some income from their savings but want to know their capital is secure.

Ordinary accounts are the most popular National Savings products. They pay a variable rate of interest but the rates are rarely very competitive so they are really only suitable for those saving small amounts who need instant access to their cash. A redeeming feature is that the first £70 of interest each year is tax-free.

The National Savings Investment Account pays a better rate of interest than the ordinary account. But it is primarily aimed at non-taxpayers as all interest is paid gross. This can be slightly more convenient than reclaiming tax paid on interest earned in building society or bank accounts, but the returns are still a little mean compared to the best-paying savings accounts available elsewhere.

Pensioner bonds are guaranteed fixed-rate investments, offering a secure monthly income fixed for two or five years. At the end of that time, you have the option to lock into fixed rates with a new bond, though the deal on offer may differ from the previous one. They are aimed at people over 60 who want a regular monthly income and do not want to take a high risk. Interest is paid gross but is taxable.

Fixed rate savings bonds can last for six months, one year, 18 months or 3 years. Interest is fixed at the start, and is paid after deduction of 20% savings tax, so these bonds are not ideal for non-taxpayers. They are designed for people wanting to build up capital, but there is a monthly income option at a lower interest rate.

Children’s bonus bonds allow anyone over 16 to save for anyone under 16. Up to £1,000 can be saved, rates are fixed for five years and the interest is tax-free if savers last the five-year term (see INVESTING FOR CHILDREN – National Savings).

Premium bonds: Each month Ernie, the Electronic Random Number Indicator Equipment, picks half a million prize winners from 23 million premium bond holders. Premium bonds are by far the best seller at National Savings, and each month, one bondholder becomes a millionaire.

The odds on it being you are 13.55 billion to one for each £1 bond you hold. The odds on winning any one prize, however, are much shorter at 22,000 to one for each £1 bond, making it one in 220 for each £100. You have more chance of winning the Lottery each week where your £1 stake gives you a one in 14 million chance. But, unlike the Lottery, you do not lose your stake if you do not win. You simply go into the next monthly draw. For the 180,000 people with the maximum £20,000 investment in premium bonds, the odds of winning the £1 million prize fall to 1 in 677.577.

National Savings calculates that with the maximum £20,000 investment and average luck you should win 12 prizes a year – 11 of £50 and one of £100. This theoretical £600 is equivalent to 5.3% for a basic rate taxpayer and 7.08% for a higher rate taxpayer. However, note that phrase ‘average luck’. There is no guarantee you’ll win anything. At present the best-paying deposit accounts are paying gross rates of around 7% – see tables on this site. What you do with the money depends on whether you want to have a flutter or not.

To find out if you have won write to Premium Bonds, Prize Draw Branch, National Savings, Blackpool FY3 9YP, or visit the website www.nationalsavings.co.uk.

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