Two questions before you start
1. Do you have any debts?
If you do, it’s far better to pay off debts before starting to save. The interest on your debts is much higher than the interest earned on savings. So pay off your debts with your savings and you’re much better off.
In some circumstances, this can apply to your mortgage as well as credit card debts too. For more info on this, please read the full Repay Debts or Save? guide first.
2. Do you want to save or invest?
It’s important to understand the difference between saving and investing as a start point.
The Savings Fountain
Different types of savings have different rules on how much you can put in and when. To max your interest, you need to pour money where it’ll pay best.
Think of it like a champagne fountain – put your cash into the best-paying savings vehicle possible, then when that’s full and overflowing, fill up the next best, and so on.
Lifetime ISAs/Help to Buy ISAs
This first stage of the Savings Fountain – Lifetime ISAs and Help to Buy ISAs – is only for first-time buyers; if you’re not a first-time buyer, skip straight to step 2.
The Lifetime ISA (LISA) was launched in April 2017. Anyone aged 18 to 39 can open one and save up to £4,000/tax year into it, as a lump sum or by putting cash in when they can. Then the state adds a 25% bonus on top. So save £1,000 and you’ll have £1,250 and save the full £4,000 and you’ll have £5,000.
First-time buyers can use the money and bonus towards the deposits for any residential property costing up to £450,000 once they’ve held the LISA for 12 months. (It can also be used for later-life saving – but be careful, as for most, saving in a pension is likely to be more lucrative.) For more, see our full LISA guide.
The Help to Buy ISA was launched in December 2015. Anyone 16+ who’s never owned a home – and may want to – can open one. It works in a similar way to a LISA, with the state adding a 25% bonus on top of your savings.
However, you can’t save as much in a Help to Buy ISA as you can in a LISA and the max bonus is £3,000, far less than the LISA’s £32,000 max. See our full Help to Buy ISA guide for more.
Plus, you can have a LISA and a Help to Buy ISA – you just can’t get the bonus on both. To see which wins for you, see our LISA vs Help to Buy ISA breakdown. If you prefer, you can watch Martin’s Help to Buy ISA vs Lifetime ISA video.
Bizarrely, some bank accounts’ in-credit rates currently smash easy-access savings accounts and ISAs – especially now all interest is paid to you tax-free. It’s a loss leader to build banking customers – yet if you’re prepared to switch account, rates are strong. Don’t just focus on rate, aim to cover as much as possible at decent rates.
If you’re not eligible for a Help to Buy or Lifetime ISA, max the best bank accounts before you move onto any of the other options. If you’re eligible for the Help to Buy or Lifetime ISA, fill that first, then move onto bank accounts before the other options below.
Once you’ve filled your current account(s), start to trickle your money into regular savings. A regular savings account can pay high interest but it’s only on a small amount of money.
While these accounts can pay slightly more than bank accounts, as you need to put cash in each month, you’d want to drip-feed it across from your bank account/top savings account anyway – hence why it’s third.
Fixed-rate cash ISAs
Once you’ve maxed your regular savings account, move any money you don’t need access to into an ISA.
A cash ISA is just a savings account where the interest isn’t taxed (so you keep all of it). Anyone over the age of 16 in the UK can put up to £20,000 in an ISA each tax year (April 6 – April 5) and once in, it stays tax-free year after year.
Better still, with fixed-rate cash ISAs, unlike normal savings, you can get access to the cash within the term – though you’ll lose some interest in penalties. Yet even if you withdraw early, these can still be winners.
Easy-access cash ISAs
If you know you’ll need access to your cash then you’ll need to go for an easy-access ISA. Here there’s no withdrawal restrictions, you can get your cash when you want it.
Don’t forget if you’ve got old ISAs built up over the years you can transfer them into a better paying ISA. But NEVER just withdraw the cash and pay it in. Full help in ISA Transfers.
If you’ve still got money left, next consider whether you’re prepared to lock it away without access – if so, you can fix with a locked in rate that’s usually higher.
Do bear in mind if rates rise over the term you can’t switch, so think carefully before fixing for longer than a couple of years. .
With whatever you’ve got left, anything you need access to stick it in an easy-access savings account. Rates are lowest compared to everything else in the fountain, but you can deposit and withdraw cash at your leisure.
All the easy-access savings deals have a variable rate, so you need to monitor them to ensure the rate doesn’t drop (switch away if it does).
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Nine quick savings tips
Before you rush off to pour cash in the fountain, here are a few key tips…
1. You don’t pay tax on savings interest IF you’re a basic-rate taxpayer and earn under £1,000 interest
From 6 April 2016 the new personal savings allowance means every basic-rate taxpayer can now earn £1,000 interest without paying tax on it, equivalent to the interest on almost £100,000 in the top easy-access savings account. Higher-rate taxpayers can earn £500 interest before paying tax, but additional-rate taxpayers don’t get an allowance.
This means that savings interest will be tax-free for 95% of taxpayers. Plus, interest earned on ISA cash doesn’t count towards this allowance – so say you earn £500 interest on ISA cash and you’re a basic-rate taxpayer, you’ll still have your full £1,000 personal savings allowance to cover other interest.
Earn more in savings interest than your allowance and you’ll pay tax at your normal rate on the amount that exceeds it (so 20% for basic-rate and 40% for higher-rate). For full details, see the Personal Savings Allowance guide.
2. Cash ISAs may still be worth it for some
If you’re a non-taxpayer a cash ISA may still be worth it. That’s because even though there’s no tax gain and the new personal savings allowance means unless you earn a substantial amount in interest you won’t pay tax on it anyway, ISAs often pay higher rates than equivalent savings. Moreover, cash ISA fixes have more access, and if you become a taxpayer again, the cash is protected then.
Plus, if you do have a lot in savings, and you do become a taxpayer again, your ISA interest won’t count towards your personal savings allowance so you’ll keep more of your interest from other accounts. See our ‘Top cash ISAs‘ guide for why it’s still a decent option.
3. Put savings in the name of the lower-rate taxpayer
If you’re in a couple and one of you pays tax at a higher rate, providing you trust each other, put non-ISA savings in the name of the lower taxpayer and you’ll take home more, as the lower taxpayer gets a higher personal savings allowance.
For those who aren’t married/civil partners, there is a tiny risk if one of you died within seven years of this that there’d be inheritance tax on it.
4. How safe are your savings?
These days every sensible saver should ask “Is my money safe?” The answer is simple. Provided your money is in a UK-regulated bank or building society account, it’s protected under the Financial Services Compensation Scheme (FSCS). Here’s the golden rule:
The first £85,000 per person, per financial institution is guaranteed.
So, if you’ve got less than £85,000, there’s no problem. Those with bigger savings, in the unlikely event a bank or building society went bust, for total peace of mind shouldn’t put more than £85,000 in any one institution. Spread it around instead. For full info, read the full Are My Savings Safe? guide.
5. Check your local credit union or building society
On rare occasions a credit union or building society beats the rates above, though usually you need to go in branch. See Credit Union Finder.
6. Bigger savers – it can be worth filling your ISA first
The Savings Fountain above is based on current rates, but if you’re a bigger saver, then maxing your cash ISA allowance each year means you’re protecting an ever bigger pot of cash from EVER being taxed. If rates rise you’ll be very glad they’re covered, as the personal savings allowance looks generous now, but won’t cover too much in savings if interest rates go back up to historical norms. ISA interest stays tax-free ALWAYS.
7. Kids get better rates
Under 16s can often earn more, and get a personal allowance as you do, but if you’re planning saving in their name, there are limits. See top children’s savings, top junior ISAs & top Child Trust Funds.
8. Ditch and switch after introductory bonus rates
Introductory bonus rates are temporary interest hikes to attract new customers. They’re actually a good thing for many, as they effectively act as a minimum rate guarantee during the introductory period – typically 12 months – promising you at least some interest. But once that period is over, the rate will often drop to next to nothing so make sure you switch.
9. Know the exact rate you’ll get
Banks quote one of two different interest rates. The gross rate is the flat amount paid while the Annual Equivalent Rate (AER) takes into account interest compounded over the year. Check which rate you’re being quoted and compare like with like. Read about the difference between AER and gross interest.
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