Putting a little money away regularly is the best way of saving up for expensive things, like a holiday, furniture, or a special family occasion.
There are two ways to save – short term and long term. Savings accounts are for times when you may need to get at your money quickly. They’re different from investments, which are really for the longer term.
Regular savings – however small – will add up. The earlier you start saving, the more money you will have to help you achieve your goals.
This section of the site will tell you about the different types of savings products, how they work, and where you can go to compare savings accounts.
Saving for the short term
There are many savings accounts around and you don’t need to save with your own bank. You can usually get your money out immediately or after a notice period, sometimes 30, 60 or 90 days. Different accounts offer different interest rates and notice periods for withdrawing your money without penalties – see www.moneyfacts.co.uk There are also other options, for example you may consider saving with a credit union or you may wish to use national savings and investments products issued by the government.
Alternatively, you may find informal savings schemes from your supermarket or local shops attractive, where you save up for your Christmas shopping or exchange for gift vouchers. But take care because if the savings scheme collapses, you could lose your money.
The main types of saving products are:
- bank and building society savings accounts (including cash ISAs)
- national savings and investments (including ISAs), and
- credit union savings accounts.
Some savings accounts have age restrictions so make sure you read the information about the account and how you can operate it.
In addition to regular savings accounts, you can also save in special Christmas savings accounts offered by some building societies and most credit unions.
Investing for the longer term
Saving for retirement is one of the biggest investments most people make. The most common way to save for retirement is in a pension, where you get tax relief on the money you pay into it – see Retirement planning.
You may want to invest money for a long-term goal, such as your children’s university fees. Investing means tying up your money for some time in products usually linked to the stock market. Their value can go down as well as up. You take calculated risks to increase your chances of getting higher returns on your money, especially over the longer term (money you can afford to tie up for five years or more) – see the Investment section for further information.
There are different types of investment. Each has its own level of risk but, basically, you take a risk with your money by investing in assets that could rise or fall in value. There is generally no guarantee you will make money or even that you will get back the same amount you invested in the first place. Investments are different from savings – they are typically designed for the longer term and involve different types of risk.
Before investing, it’s usually a good idea to have sorted out your debts, made sure you’ve looked at protecting yourself against unforeseen events (see Insurance), built up some savings and arranged your pension (see Pensions – your pension is also an investment).
And, once you start investing, it’s highly advisable to spread the risk of losing all your money at once by investing in different types of investments (known as diversification). Often when one type of investment falls in value, another type may rise. Diversification helps to balance out the ups and downs over time.
How your savings grow
You usually put your money into an account where it earns interest. It grows from interest being added either monthly or yearly; interest added on top of that interest is called ‘compound interest’. Income tax is usually taken off by the bank before you receive it – this is shown on your statement. Cash ISA’s (Individual Savings Accounts), let you receive your interest free of income tax. It’s worth shopping around to get the best one for you – www.moneyfacts.co.uk is again good for this.
This can be a slow process and can take many years for your original deposit to grow by very much. You also need to save regularly and not dip into it, if you can help it. Be aware of the impact inflation can have on the value of your savings – see Inflation.
Use our savings calculator (found as a drop down option under calculators on the home page) to find out how your savings might grow in the future or to help you work out how you can meet your savings goal.
Banks and building societies are required by law to deduct income tax from interest before they pay it to you, normally at 20%. If you’re a higher-rate (40%) or additional-rate (50%) taxpayer, you’ll owe tax on the difference so you’ll have to let your Tax Office know so they can arrange to collect it. Non-taxpayers can arrange for interest to be paid gross (before tax) by completing form R85 – available from your bank, building society or HM Revenue & Customs. Or, if you’re on a low income, you may be able to claim tax back.
Tax on children’s savings accounts
If you open an account for your child you will need to complete an R85 form so that they receive their interest without tax taken off. At age 16 they become responsible for their savings accounts and have to reapply for tax-free interest by completing the R85 form themselves. Any accounts not held in their name will need to be transferred to them.
If your child earns enough money to pay income tax before their sixteenth birthday, you should let their Tax office know immediately.
You can pay money into the child’s account but if the account earns more interest than a certain limit a year, this interest may be taxed as if it were your own.
Alternatively, you can start a Junior ISA for your child. There are two types of Junior ISA – cash and investment. All children under 18 who are not eligible for a Child Trust Fund can open one. You (as well as friends and family) can save up to £3,600 into the ISAs each tax year, and neither you, nor you child, will be taxed on any interest or gains in the account.
Inflation happens when prices go up throughout an economy. The effect of inflation on your money means that the money you save will buy less each year.
To protect your savings against this, you should look for an after-tax interest rate that is more than the rate of inflation. Or if you want to put your money away for a longer period and are prepared to take the risk that your money could fall in value (as well as rise), you could put some into an investment linked to the stock market. For more information see Investments.
Firms not based in the UK
By law, most financial services firms must get authorisation from the Financial Services Authority (FSA), the UK’s financial services regulator, before they can do business in the UK. The FSA Register has information on all authorised firms currently doing business in the UK. The FSA Register includes firms that are UK authorised as well as those authorised in another European Economic Area (EEA) state that also conduct business in the UK.
If you are considering or currently doing business with a firm authorised in another EEA state you may wish to ask for further information from the firm or its UK branch about its complaints and compensation arrangements. This is because the position may differ compared to a UK-authorised firm. EEA firms will also be able to provide you with details of the extent of their regulation by the FSA in the UK.
If you do business with a UK branch of a bank authorised in another member state the compensation arrangements will not be the same as FSA-authorised banks based in the UK. See the Financial Services Compensation Scheme (FSCS) website for more information.