SAGA — Doing things properly

A guide to savings accounts - part two

So what types of accounts are there to choose from? Here are some options for you from Saga money expert John Husband:

ISAS: Best haven for instant access cash is a tax-free cash ISA, Individual Savings Account. You can put up to £3,000 a year in one – which is just about the right amount to have ready for emergencies. Strangely cash ISAs are equally good for non-taxpayers because the rates they pay are normally better than the gross – before tax – rates on most non-ISA accounts.

Cautious savers will prefer to have a lot more than £3,000 in cash savings because they are not keen on higher risk investments.

So where next after cash ISAs?

BRANCH DEPOSIT ACCOUNTS at banks and building societies have been the mainstay of savers for centuries. But the rates offered are miserably low. So unless it also doubles as a current account you’re better off looking elsewhere for a worthwhile return.

TELEPHONE and INTERNET: Most providers have been cutting costs by removing branch staff and encouraging depositors to use TELEPHONE and INTERNET accounts instead. They pay higher rates of interest but it is more awkward depositing and withdrawing money. You may have to post cheques to those without a branch network and withdrawals may have to paid only into a nominated bank account.

LARGE DEPOSITS: Some accounts pay as much as 3 or even 4 per cent more for large deposits. For it costs them the same to handle an account with £5 or £50,000 in it. If you’re dealing with very big provider that should be fine. But do bear in mind the limits of the compensation scheme for depositors.

NOTICE ACCOUNTS: At one time these offered a substantial premium over instant access accounts. But this has narrowed considerably recently and can be worth as little as a quarter per cent more. If interest rates seem stable it might be worth going for these. But do bear in mind that you may lose interest if rates change suddenly and you can’t take advantage of them immediately.

FIXED RATE ACCOUNTS: These are normally also for a fixed term, typically one year. They may offer you as much as one per cent extra. If rates seem stable or are more likely to fall than rise they may be worth going for. But if there a possibility of an increase in the offing it may be worth foregoing that extra 1 per cent for the chance of even better returns sooner rather than later.

BONDS: These offer a fixed rate for one, two or even five years. Only worth considering if rates look stable or likely to fall.

REGULAR SAVINGS ACCOUNTS: At one time these were mainly targeted at smaller savers and would-be first time homebuyers wishing to accumulate a deposit for a house. More recently the major banks have been using them as an inducement to attract new current account holders and account switchers. The rates can be attractive – as much a ten per cent before tax. But you only qualify if you bank with them or open your account with them. And the rate is normally paid for just one year after which it plummets. Typically the maximum amount they will take is £250 a month – £3,000 in a year. So while the interest rate is large the actually amount of interest you’ll earn is limited. But they have their uses. They’re a good way of setting money aside out of earnings or a pension, for example, to pay for holidays or Christmas. And if you haven’t already made use of your ISA allowance there are a number of regular savings ISAs paying attractive rates of interest.

MONTHLY INTEREST: For those needing their savings to generate an income these are quite useful. But do bear in mind that the rate paid may a little less than on accounts paying interest yearly or half yearly.

NATIONAL SAVINGS: takes in quite a range of different savings products. National Savings Certificates offer a fixed tax-free return over two or five years. They are reasonably attractive to higher rate taxpayers. They pay a reduced rate if cashed in early and nothing at all if surrendered in their first year. Index-Linked Savings Certificates were much sought after when first introduced during the runaway inflation of the 1970s -even though the rate paid merely compensated for the rise in the rate of inflation as measured by the retail prices index. Now they offer an additional tax free yearly interest rate on top – 1.15 per cent for the three year bonds and 1.1 per cent on the five years ones. They’re quite attractive for higher rate taxpayers and worth considering if you pay basic rate tax. As with the fixed rate certificates there are penalties for early withdrawal. National Savings also offers a range of fixed rate, capital and pensioner bonds. None are market-beating but they are all Government guaranteed.

PREMIUM BONDS are in a world of their own. They compete with horse racing, the National Lottery and football pools in offering you a chance of winning big prizes every month and two chances to become a millionaire. Unlike other gambles the only money you lose is the interest you might otherwise have earned. On the other hand the prize fund comes from the yearly interest – currently 3.15 per cent – the Treasury pays on the money invested. And someone with the maximum holding – currently £30,000 – is are likely to make that tax free return in the form of a regular stream of prizes.

* John Husband's opinions are his own and are for general information only. Always seek independent financial advice.