First Home Buying
First Time Buyer Guide
Savings Accounts Explained
In order to pick the best one you’ll have to factor in whether or not you will need access to the money, how long you can put it away for and the tax you may have to pay on the interest.
What is the Personal Savings Allowance?
Since April 2016, all UK taxpayers have a personal savings allowance (PSA) which is the maximum amount of interest they can earn on their savings before they have to pay tax. Basic rate (20%) taxpayers can earn up to £1,000, higher rate (40%) taxpayers £500, and additional rate (45%) taxpayers don’t get an allowance.
Types of Savings Accounts
A cash ISA (individual savings account) allows you to earn tax-free interest on your savings, but you can only put in up to £20,000 per tax year. Each tax year you get a new £20,000 ISA allowance. You can also take out a Lifetime ISA to save for your first home using £4,000 of your allowance.
Cash ISAs are a good option if you are a taxpayer and you exceed your personal savings allowance, as the interest earned is tax free.
Easy Access Savings Account
An easy access savings account pays interest – typically around 1.3% – and allows you to take money out whenever you want. They are flexible, as you can save at your own pace, but offer a lower return than regular savings accounts.
They are a good option if you think you will need to withdraw some of the cash. But bear in mind that some of these accounts only allow you to make a certain number of withdrawals per year, and the majority of them offer an introductory ‘bonus’ rate for 12 months which then reverts to a lower variable one once that period is over.
Regular Savings Account
A regular savings account requires you to commit to putting in a certain amount each month and in return the bank or building society will pay you a higher interest (around 2 to 5%) than with other savings accounts. They do, however, tend to impose strict terms and conditions that you must comply with or you might end up losing the competitive rate you were after in the first place.
With most banks or building societies you:
- might have a minimum quantity of monthly payments
- usually have to open a current account with the bank
- are likely to have your money moved to the above-mentioned current account once the term of the regular savings account is over (usually 12 months)
- shouldn’t make any withdrawals nor stop paying into the account every month because the interest rate might be reduced
Regular savings accounts are a good option if you don’t want to invest a lump sum, don’t need access to the money during the term of the agreement and you want to benefit from the higher interest rate they offer.
Is My Money Safe?
Any cash you put into banks or building societies in the UK, up to a maximum of £85,000 (or £170,000 for joint accounts) per authorised firm, is protected by the Financial Services Compensation Scheme (FSCS).
Some banking brands are part of the same authorised firm, so it’s worth noting that if you have more than the limit in one firm the excess will not be protected. The best thing to do in this instance is to move that excess to a different bank.
To narrow down your search for the most suitable savings account make sure you compare a variety of products, paying special attention to how long you’ll need to lock your money for and whether you’ll be able to access it at any point.