Where Should I Save?

Written by Karen Bryan

where to saveOnce you’re worked out your essential spending and decided how much to save, the next question you need to ask yourself is “Where should I save?”. I’ll illustrate some options on where to save by describing what I’ve done with our savings. One thing to bear in mind is that up to £85,000 of you savings per institution is protected under the Savings Protection Scheme if that bank/building society goes bust.  But you also need to be aware that some banks with different names are part of the same group e.g. Santander, Alliance & Leicester and Bradford & Bingley.

Instant Access Savings

I use an instant access savings account as a home for our short term savings and emergency fund (of 3 months spending). At present they are in a Halifax Saver Reward which is pays 2.8% interest (variable) per annum, plus an additional 0.2% bonus as I have a Halifax Reward Current Account.  I also have a Satanter eSaver Issue 4 paying 3.1%.You do need to watch out for the small print as some instant access accounts only allow a limited number of withdrawals per year.

Cash ISAs

A Cash ISA in which you can currently (tax year ’11-’12) receive tax free interest on a maximum of £5,340 is a good start. In April 2011 I opened a Halifax ISA Reward which is currently paying 3% interest (variable) tax free plus an additional 0.2% bonus as I have a Halifax Reward Current Account. I wasn’t tempted by any of the fixed rate Cash ISAs, as at that time, April 2011, as I hoped that interest rates would increase in the coming months. However the consensus now (September 2011) seems to be that interest rates won’t rise until at least 2012. Only hindsight will tell if you’ve made the right decision whether to opt for a fixed or variable rate Cash ISA.

Fixed Rate Accounts

You can get a higher rate of interest on fixed rate account which can run from between 6 months to 5 years.  However you may risk losing out if interest rates do increase but do well if interest rates fall during the lifetime of your account. Many of these accounts have early closure penalties. In November 2009 I put some money into a National Savings & Investment 5 Year Growth Bond paying 4.6% interest per annum. At that time I was a bit uneasy about tying money up for so long but I worked out that as long as I kept the account for at least two years, I’d receive a reasonable return, if I decided to close the account early if interest rates did rise. With hindsight that 4.6% rate of interest is looking alluring almost two years later.

Stocks & Shares

In the past stocks and shares have historically outperformed saving accounts. However once you start share dealing, there is a risk to your capital. Therefore I’d only invest money in the stocks and shares that I could leave there for the long term and, in the worst case scenario, be able to afford to lose the capital. You can use a tax free ISA wrapper for stocks and shares up to the value of £10.680 in the current (’11-’12) tax year.

Build Up Your Pension

If you are already paying the maximum into a workplace pension scheme into which your employer also makes contributions, you could take out a stakeholder pension and get tax relief on up to 100% of your earnings, capped at £50,000 for current (’11-’12) tax year. Again this is a long term investment as you have to be at least 55 years old before you can cash this in. As your pension pot will be invested in stocks and shares your pension value can’t be guaranteed you can be left wondering when to retire; whether to take your pension the or to hang fire in the hope that the value of your pension pot increases.

Conclusion

In the current economic climate, with inflation higher than interest rates on savings account and a stock market has fallen in value, you need to do a lot of research to find the best home(s) for your savings and it’s hard to make a real return to boost the value of your savings. The problem is that even a top rate Cash ISA is not keeping pace with inflation, so your money is losing spending power. However inaction can cost you even more, as some savings accounts, especially after expiry of bonuses, pay less than 1% (taxable) interest. There is more potential gain (and loss) by investing in stocks and share with tax advantages if you use a ISA wrapper or get relief on pension contributions. I don’t think anyone is sure of the correct/best answer to the question, “where should I save?”.  A lot depends on your attitude to risk; do you play if safe and stick to savings accounts or reckon that in the long run you’ll do better in the stock market?