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John Husband
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Savings Accounts Guide
Rich or poor, the most vital part of your savings is the amount you keep in cash. This is your first defence in an emergency – which can be anything from the larger-than-expected energy or phone bill or urgent repairs needed to fix the roof, writes John Husband
Ideally you should aim to keep at least three months income in cash accounts which can be drawn on instantly or short notice. That applies no matter how wealthy you are. Many a rich investor has come a cropper because lack of ready cash forced them to cash in shares or sell a property when prices were depressed. When times are tough those with cash are kings. But before deciding where to put your money there are several key things to bear in mind:
SAFETY: There’s no point in getting a fat rate on your money if you never see it again. We live in an uncertain world and banks can and do go bust. The only really secure investment is one which is Government guaranteed. So while NATIONAL SAVINGS ACCOUNTS may not offer the highest return they are the only ones which are risk free.
Authorised BANK and BUILDING SOCIETY ACCOUNTS are covered by the Financial Services Compensation Scheme. If any of them were to fail you’d get back the first £2,000 invested and 90 per cent of the next £33,000 resulting in a maximum repayment of £31,700. So if you have a very large amount on deposit its worth splitting it to make the most of the guarantee.
Some savers are tempted to put money into OFFSHORE ACCOUNTS. Do bear in mind that these may not necessarily be covered by the guarantee – even if they are in overseas branches of UK banks.
TAX: Twenty per cent tax is deducted at source from most bank and building society accounts. So bear that in mind when looking at the rates they offer. The key exception is money in cash ISA accounts – but more about them later. You must declare interest received and if you are higher rate taxpayer you’ll be asked to pay a further 20 per cent tax. If you’re a Non-Taxpayer you can reclaim the tax deducted from HMRC. But it is much simpler to ask your provider for form IR85 to complete which will authorise them to pay you the interest gross in future. If you or your partner is on a lower tax rate or is a non-taxpayer it makes sense to put most, if not all, of your cash savings in the lower earner’s name.
ONLINE: In theory banking or saving online should be no more risky than operating a branch account. But there are dangers which you must address. Identity fraud is the main one. To avoid getting caught:
• Never write down passwords, login details and PINs and never disclose them in response to any unsolicited emails – even from your bank or the police.
• Shield your hand when entering your PIN in a shop or cash machine.
• Only divulge card details on the phone if you made the call and know the company.
• Ensure your computer has anti-virus software and a firewall installed.
• Avoid logging on using other people’s computers – at work, in hotels, internet cafés or libraries, for example. For there’s a danger later users may discover some of you security details.
• Always access internet banking or savings websites by typing in the address – never by a link from an email.
For more advice log on to www.banksafeonline.org.uk
BONUSES: A clever trick many providers use is to offer an introductory bonus, typically 0.5 or 0.75 per cent more. So they may advertise an account with a basic 4.25 per cent rate as one offering 5 per cent. The sting is in the tail. Many of these bonuses last for less than a year, some even for only six months. So it is impossible to enjoy the annual rate quoted even for a single year.
PENALTIES: If any offer looks unusually attractive do be sure to read the terms and conditions very, very carefully. Regular savings accounts, for example, may slash the rate promised if you miss a payment or make a withdrawal. Likewise notice accounts may restrict how much you can withdraw and how often.
Click here for part two of John Husband's savings accounts guide
This article was created: 4 December 2006.
This article was last edited: 30 April 2007.
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