Know your limits: 3 smart ways to spread your savings

27 February 2020

Here are some rules of thumb to help you get the best out of bank accounts, Isas and pensions

Image

Few of us relish life admin, but getting all of your bank accounts, Isas and pensions in order can bring huge benefits to both our wealth and wellbeing – from finding lost pensions to slashing fees and charges. To tidy up your money, without putting your cash at risk, here are some rules of thumb to help you use your short, medium and long-term savings to your advantage.

Bank accounts (short-term money)

Unfortunately, bank current accounts haven’t paid a healthy level of interest (think around 5%) since the financial crisis more than a decade ago. Therefore they may not be the best place to keep your money if you’d like it to grow in the short-term. Three to six months expenditure in cash is a good safety net, which you may want to leave in your current account.

For larger amounts, be aware that £85,000 is the maximum you’ll be able to claim back via the Financial Services Compensation Scheme (FSCS), if your bank goes bust. This deposit protection limit is per person, per bank or building society. For joint accounts each named holder is protected to the value of £85,000 (meaning two named account holders could claim a combined £170,000).

With this limit in mind, it might be prudent to spread your cash across multiple accounts. Keeping it all in one place can seem simpler, but anything above the deposit protection limit is at risk, and relying on a single bank can leave you with no access to cash if it suffers an IT glitch (remember NatWest and RBS on Black Friday last year?) or otherwise locks you out. 

Isas (mid-term money)

Interest on cash Isas isn’t much better than current accounts these days, however investment Isas can be a good way to save up to £20,000 a year (2019/20) and make tax-free gains. You don’t need to open a new Isa each year for this but, perhaps surprisingly, lots of people do, creating a maze of accounts.

It will become much easier to keep an eye on how your investments are performing if you combine all of your Isas in a single account. You can either pick one of your existing Isa accounts and transfer the others into that, or open a new Isa and move your old ones there. Your Isas’ tax-free status and annual allowance won’t be affected.

You may find that some providers will charge you to move your money, and while many don’t, it’s worth double checking before you commit to any transfers. You may still be able to save money even if they do, as fewer pots means you’ll be paying for just one account not several, and you can choose the best value option. Before you take steps to combine your Isas, ensure that your investments are diversified to mitigate the risks of putting all of your savings into a single fund. 

The FSCS protection limit for Isas, cash and stocks and shares, is also £85,000. If you have a lot saved in Isas it could be worth spreading your savings and investments across a few accounts with different companies to stay under these limits.

Pensions (long-term money)

If you’re anything like the average UK worker, it’s likely you’ll have 11 jobs in your career, which probably mean 11 pensions too, thanks to Auto Enrolment. Over time you might decide to consolidate all of your old pensions into one.

A single pot means you can easily see if you’re on track for the lifestyle you want in retirement, or if you need to increase your contributions. You’ll also benefit from enhanced compounding – one big pension pot fed by contributions and investment returns is likely to grow much faster than lots of smaller pots.

Plus, you’ll only pay one set of fees and can choose the best value option. With a long-term investment like a pension, charges are extremely important, especially if you’re a long way from retirement. Tens of thousands, even hundreds of thousands, of pounds, can be eaten away in fees if your savings aren’t invested sensibly.

Much like Isas, it may still pay off to transfer any pensions with exit fees as the money you’ll save in the long run could far outweigh a one-off fee. If you’re nearing retirement it might be prudent to wait until age 55 to move your pension as this is when the 1% exit cap kicks in.

When it comes to pensions, there are some caveats. Moving a defined benefit (“final salary”) pension is likely to mean losing a guaranteed income for life that rises in line with inflation and exposes your pot to investment risk. Likewise, if any of your pensions offer guaranteed benefits, such as annuity rates, you’ll also lose these if you transfer out. 

It’s worth noting that while pensions are protected by the FSCS, the amount you can claim, should your pension provider fail, will vary depending on how your pension plan is structured. Some personal pensions are structured as ‘contracts of long-term insurance’, which means that the FSCS will cover 100% of your claim, with no upper limit.

Whereas if you have a self-invested personal pension, which is classed as an ‘investment’, you’ll only be covered up to £85,000. For added peace of mind you may want to check with your provider directly to see if your pension benefits from the full protection.  

Romi Savova is CEO of online pension provider, PensionBee