Regular savings accounts can be a great way to get into the habit of putting money aside on a regular basis, but what are they, how can you benefit, and how can you find the right deal for you?
Read on to find out more about these nifty little accounts, and see how a regular saver could put you in control of your finances and help you reach your savings goals.
These accounts can be a great way to start your savings pot, in that they typically ask you to deposit a minimum amount each month – and they’ll encourage you to keep going by serving hefty interest penalties if you miss a monthly payment. Similarly, they often charge harsh penalties if you make a withdrawal, which should help curb any temptation to spend your savings.
The minimum monthly deposit will usually be of at least £10, although this can vary depending on the account you choose. You’re also limited by a maximum you can put into your account each month, typically up to £250 or £500, to prevent people from depositing already hefty savings pots in the hopes of getting higher rates.
This is because these accounts tend to offer higher rates of interest than can be found on normal accounts, and are currently one of the few sectors of the market where it’s relatively easy to get an inflation-beating return.
At its most basic level, regular savings accounts ask you to pay in a set amount each month. They’ll typically ask you to specify how much you’re looking to pay in and how you plan on doing so (you may be asked to set up standing orders, for example), but some will let you change your monthly contribution and method of payment as the months go on.
All you have to do is meet the requirements and you’ll earn interest on your savings, with interest typically being paid on an annual basis. Just be aware of the penalties associated with missing a payment and making a withdrawal (if allowed), and make sure you can commit to the terms before you sign up.
Bear in mind that each account will have different requirements – some have lower maximum and minimum deposit limits than others, while some may not penalise you for missing a payment and others will even let you make a withdrawal. Remember too that the best regular savings accounts often have the strictest requirements, so always compare accounts and their features thoroughly before you make your decision.
These accounts are taxed in the same way as any other non-ISA savings account, in that you’ll be taxed according to your income tax bracket (basic, higher or additional rate).
However, the Personal Savings Allowance (PSA) means that the vast majority of savers won’t be taxed at all – basic rate taxpayers can earn up to £1,000 in interest tax-free each year, while higher rate taxpayers get a £500 limit and additional rate taxpayers don’t get any allowance – and this applies to all non-ISA savings accounts.
Even with the best regular saver accounts, you’re highly unlikely to breach the limit, for the simple reason that the investment limits are so low. Just bear in mind that, if you’re a higher or additional rate taxpayer and/or have a big enough savings pot elsewhere, your regular savings may actually be taxable, so you’ll have to declare them accordingly (as per PSA rules).
The amount of interest you can earn all depends on how much you deposit each month, and your annual savings rate. Calculating regular savings interest is a complex process – rather than earning interest on one lump sum that you deposit from the outset, the money is being drip-fed into the account, so (for example) you could have an annual interest rate of 3% but only earn the full yearly amount on the initial deposit.
EXAMPLE: You have an account paying 3% and deposit £250 each month for a year. You’ll earn 3% for 12 months on the first deposit of £250, then 3% on £500 (the first and second deposit) for 11 months, 3% on £750 for 10 months, and so on and so forth. At the end, you may have £3,000, but you’ll only earn 3% interest on that amount for a single month (in this example, you’d earn £49.20 in interest after the first year).
Depending on how and when interest is paid, you may need to consider the effects of compounding as well. Because of the complexity, it’s worth using a monthly savings interest calculator to get an idea of the amount of interest you'll earn, and as luck would have it, we’ve got one right here!
The first step to making the most of these accounts is finding one that meets your needs. While many come with hefty restrictions, there are a few that are a bit more lenient in terms of accessibility and deposit requirements – a growing number are allowing withdrawals, and not all will penalise you for missed payments – so make sure to look at the small print before opening the account.
One of the most important decisions you’ll need to make is whether you want a fixed or variable rate deal. Fixed rates tend to come with more restrictions for the trade-off of a better rate, while with variable deals there’s the chance that the rate could change over the term of the account, so there’s no guarantee how much you’ll be left with.
There are a growing number of regular saver accounts with 12-month terms, which could be ideal for those saving up for a specific purchase in a year’s time. If you’ve got more long-term goals, such as saving for retirement or your child’s university fees, you may want to look at variable rate deals with no fixed term, which could allow you to benefit from compound interest over the years.
You may also want to speak to your current banking provider to see if you can secure even better deals – many banks offer loyalty-based regular saver accounts that are exclusive to current banking customers, and the rates on offer tend to be far higher than those offered to the masses. In this instance, loyalty can definitely pay, as you’ll often be able to find the best accounts by sticking with your bank, but that doesn’t mean it’s the only option.
Indeed, you can have as many regular saver accounts as you wish, but you need to be confident that you can meet the requirements of each. Bear in mind that, if you have enough savings to split between several monthly savings accounts, it may be worth looking to fixed rate bonds instead, as investing a lump sum means you’ll be able to benefit more from the power of compounding.
The best regular saver accounts for the over-50s will be similar to those for any other age group, in that it’ll depend on what you’re saving for and the kind of account you’re after. If you’ve got a set goal in mind you may want an account with a fixed term, or if you’re saving for retirement, a variable rate deal without an end date could be more suitable. Again, to find the best monthly saver it may be worth speaking to your provider, who may be able to offer better rates.
Regular savings accounts are designed to kick-start your savings. Make sure you can commit to making the minimum monthly contribution, and that you won’t need access to your money during any initial term. Bear in mind that missed payment and withdrawal penalties are often harsh, particularly with fixed rate accounts, but it is also these that tend to pay the best rates.
Regularly saving into a dedicated account is one of the best ways to meet your goals, and with plenty of banks and building societies offering such a deal – often with loyalty bonuses if you’re already a customer – it makes sense to consider these accounts. Start comparing deals and see if you can benefit.
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Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.