How to save into your Nisa
Writer and poet Oscar Wilde once famously uttered: "When I was young I thought that money was the most important thing in life; now that I am old I know that it is." He wasn't wrong.
Getting into the saving discipline can pay rich dividends in later life – and even putting small amounts away on a regular basis can help you build a nice buffer to fall back on.
Put away just £10 a month for 10 years and at a rate of 3% gross, that would result in a pot worth £1,398, or £4,446 after 25 years. If you can manage to stash away £50 every month for 25 years, you would end up with £22,231, raise it to £100 and you will have £44,462.
The real secret of successful saving is not just finding the right account at the best rate but also exploiting the impact of compound interest. Allegedly labelled the 'eighth wonder of the world', by Albert Einstein, compound interest simply means that as your savings grow, the interest paid will be higher as the pot rises in value.
But while the importance of saving and having a nest egg for later life, or even a rainy day, cannot be underestimated, unfortunately when it comes to stashing our cash, Britons still have a long way to go.
At present a massive 10 million (or 19% of the UK's adult population) are without any savings at all, according to research from Santander. The bank also found there is a worrying gender gap too, as women's savings habits are lagging significantly behind their male counterparts.
Its analysis uncovered that while the average Briton has £20,380 held in savings, this figures falls to £13,070 for women, compared to £28,079 for men. This currently makes the savings gender gap in the UK a whopping £15,009.
Many have understandable reasons for not saving as their disposable income is being squeezed by the high costs of everyday living, coupled with hefty outgoings on necessities such as childcare and the mortgage. But it is always worth taking a good look at your spending habits. Do you need that expensive daily latte, given it is costing you around £50 every month?
If you smoke, by quitting you could find yourself far better off, and not just in terms of your health, as the typical smoker could save around £3,000 a year by stubbing out their habit.
HOW TO START SAVING
The prolonged period of low interest rates – now at 0.5% for the past five years - may have been good news for borrowers but on the flip side banks and building societies have, as a result, slashed their savings rates to the bare minimum, meaning that decent paying accounts have all but disappeared.
Even so, getting into the habit of saving makes sense - and putting away something is obviously far better than nothing. But ensure you pay off any debts such as credit cards or personal loans first, as the interest you pay on them – typically 18% on a credit card – is way above what you will earn on any savings account.
Ensuring you seek out the best deal on the market available to you is key. Independent savings advice site SavingsChampion.co.uk estimates a massive £5 billion of interest is being lost by not switching to the best paying accounts.
Anna Bowes, a director at SavingsChampion, explains: "It is always a concern if people are not putting aside enough or, worse still, any savings for their future. Although it's not wholly surprising with the cost of living continuing to rise, albeit at a slower pace, it's still essential that everyone puts something aside.
"In the current low interest rate environment there may be less incentive to save but people have to think about their future as well as saving up for things they may need in the short term."
HOW TO SAVE £50 TO £250 A MONTH
The first port of call for any taxpaying saver, no matter how much they are looking to squirrel away, is an individual savings account or Isa as it is better known. Each tax year, all Britons aged 16 and above are given an Isa allowance, which is simply a normal savings account but all interest earned is protected from the clutches of the taxman.
In a normal savings account a basic-rate taxpayer pays 20% of the interest they earn in tax, rising to 40% for higher-rate taxpayers but once savings are wrapped in the safety net of an Isa, all gains are protected.
The only downside of Isas is that savers are limited to how much they can store away and in the current tax year, 2014-2015, the annual allowance is £11,880 and just £5,940 may be used for a cash Isa, where the remainder can be invested in a stocks and shares Isa.
However, as announced in this year's Budget, from 1 July 2014 a new Isa, or Nisa, is being launched, which will see the annual limit soar to £15,000 – and savers can use the total allowance for cash if they so wish.
Despite the new limits catering for those with deeper pockets, for those saving smaller amounts, be it on a regular basis or via a lump sum, a cash Isa will usually offer the best deal (unless there is a non-Isa account on offer, which pays a greater rate of interest, even after tax) so it always makes sense to double-check what is on offer.
But remember, if you are a higher-rate taxpayer (40%), you will need to earn 1.67% on a normal savings account just to equal every 1% you earn through an Isa, while a basic-rate taxpayer (20%) would have to make 1.25%.
The long-term benefits of an Isa can be very rewarding because, provided the money is held within the wrapper, it will be earning tax-free interest for the life of the account and those who had invested the full amount each year into a cash Isa, since they were started in 1999, would now be sitting on a massive lump sum of almost £66,000*.
REGULAR SAVINGS ACCOUNTS
If you are planning to start small, at say £50 a month, or even up to £250, a regular savings account is a good way to become disciplined. As a general rule, with a regular savings account you agree to pay in a set amount of cash (although some accounts let you vary the amount, every month typically for 12 months).
The downside is that, you may not be able to access the cash during the savings term and the interest is typically added at the end of the year before your money will be transferred to a lower interest account. It is worth noting that the rates on regular savings accounts do not tend to be the most competitive in the marketplace.
Essentially, regular savings accounts are chiefly suitable for those who have some spare money to put away on a regular basis and are a good way to start forging a savings habit. For this reason, they are not suitable if you have a lump sum to invest.
But if you are looking to save more than £250 a month, you will be more restricted in terms of good offers on the market and the best paying cash Isa is most likely the best home for your cash.
Another option is so-called notice accounts, where if you need to get to your cash you can do so on the proviso that (surprise, surprise) you give your bank notice, and 120 days' warning is not uncommon.
While they usually pay higher rates than standard easy-access savings vehicles, the minimum deposit is often quite high at £1,000 but there are accounts that will go much lower.
EASY-ACCESS SAVINGS OR ISAS
If you want to start saving every month but are concerned you might need the cash in a hurry, instant–access accounts may be right for you, as you can get your hands on your funds whenever you want without any hassle.
Some accounts pay tiered rates of interest, so the more money you put away, the better the rate of interest you get. And remember, if you save into an easy-access Isa, interest is paid tax-free; but be warned, if you withdraw the money from your Isa, you will not be able to put it back in if you have already used all of your year's allowance.
WHAT ABOUT SAVING A LUMP SUM?
For savers looking to store away a lump sum between £1,000 and £15,000, the best paying Nisa (from 1 July) will be the place to be and it may well be worth your while looking at a fixed-rate Nisa.
With these accounts, also referred to as fixed-rate bonds, the interest on offer tends to be more attractive, as savers need to lock their cash away for
a set period of time, typically between one and five years.
While in some cases you can access your cash if necessary, you may have to pay a steep penalty to do so and some won't allow access at all until the end of the term, therefore you really need to be happy to lock the money away.
But once you are happy to leave your cash alone for the set period, they are generally the highest paying accounts, with the rule of thumb being the longer you lock away your cash, the higher the interest rate.
At this point, once you have maxed out your annual Nisa allowance of £15,000, it really comes down to earning as much as interest as possible on the rest of your cash and shopping around for the best non-Nisa deals available to you.
With a lump sum saving of this sort of size (or indeed even for some smaller savers), look at what will you want that money for – a deposit on a new home, a new car or perhaps children's university fees, for instance.
The main thing is ensuring you can access the cash if you think you will need to, so while a five-year fixed-rate product may offer a great rate, it may not be worth it if you need your cash in an emergency.
CURRENT ACCOUNTS:THE NEW SAVINGS ACCOUNT?
A new trend rearing its head is that of current accounts taking on savings accounts. For example Santander's 123 cashback current account, is offering savers 1% interest, on balances of £1,000 or over, 2% on £2,000 or more and 3% on balances between £3,000 and £20,000.
TSB Bank recently launched its own salvo in this field with its Plus bank account, which offers a hefty 5% credit interest on balances up to £2,000 but the drawback with these products is that a minimum monthly deposit is required; TSB and Santander are looking for £500 to be paid in every month.
The also recently introduced Lloyds Club Monthly Saver account offers an interest rate of 4% on monthly deposits of up to £400.
* Assuming the maximum cash Isa allowance was invested on the first day of the tax year and earned the equivalent of the Bank of England base rate, the amount that would be held in a cash Isa would be £65,991 as at February 2014.
There are limits to how much you can invest in any tax year. For 2011/12, the limit is £10,680. Of that, the maximum you can invest in cash is £5,340 and the balance of £5,340 can be invested in shares (individual company shares or investment funds). If you don’t take the cash ISA allowance, you can invest up to £10,680 into a stocks and shares ISA.
Regular savings accounts
The attraction of these accounts is the high interest rate they pay. They require customers to deposit money each month, without fail. They come with a number of restrictions, such as monthly deposit limits, no one-off lump sum deposits and restricted withdrawal facilities. Although they are marketed with impressive-looking rates, it’s important to remember that as your money builds up gradually, your overall return will be lower than if you’d deposited a lump sum.
Invidivual Savings Accounts were introduced on 6 April 1999 to replace personal equity plans (PEPs) and tax-exempt special savings accounts (TESSAs) with one plan that covered both stockmarket and savings products, the returns from which are tax-exempt. The ISA is not in itself an investment product. Rather, it’s a tax-free “wrapper” in which you place investments and savings up to a specified annual allowance where the returns (capital growth, dividends, interest) are tax-exempt (you don’t have to declare ISAs and their contents on your tax return). However, any dividends are taxed within the investment, and that can’t be reclaimed.
An account opened with a clearing bank (few building societies offer current accounts) that provides the ability to draw cash (usually via a debit card) or cheques from the account. Some pay fairly minimal rates of interest if the account is in credit. Most current accounts insist your monthly income (salary or pension) is paid directly in each month and they offer a number of optional services – such as overdrafts and charge cards – which are negotiable but will incur fees.
This is effectively paying interest on interest. Interest is calculated not only on the initial sum borrowed (principal) or saved (see APR and AER) but also on the accumulated interest. The more frequently interest is added to the principal, the faster the principal grows and the higher the compound interest will be. Compound interest differs from “simple interest” in that simple interest is calculated solely as a percentage of the principal sum.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.