Choosing the right savings account

Jun 9, 2011   //   by sam   //   Banking and Savings Accounts  //  Comments Off on Choosing the right savings account

Regularly putting money away into savings accounts can be hard enough without worrying about scour savings market in order to find a account that offers the best interest rates.

UK interest rates have been kept at the record low of 0.5% since March 2010 and there are no signs that it will improve any time soon.

This means that banks are continuing to struggle to offer savers a decent rate on their savings.

However, despite the low base rate there are ways in which savers can boost the earnings from their surplus funds, some adding in the element of risk.

Tax Free Savings Accounts

Some people may be surprised learn that the earnings made from the interest paid on savings accounts and investments is taxed.

The income tax percentages depends on your annual earnings, but can be up to 50% which means you would be losing half of any returns to the tax-man.

There is away to avoid paying income tax on at least some of your savings, so the first avenue you should explore when looking for a home for your savings is the Individual Savings Account (ISAs).

These unique savings accounts allow all UK individuals to save up to £10,680 a year (running along side the tax year from April – April) and pay no income tax on your earnings.

This tax break provides the means to build up a substantial savings pot over time by adding to it each year.

ISAs come in two forms, cash ISAs – which work in the same way as savings accounts or fixed rate bonds with little or no risk; and Stocks and Shares ISAs – which offer the potential to earn significantly higher returns while paying no tax on your earnings.

Savers can use invest up to half of their annual tax-free allowance into a cash ISA, while the remaining £5,340 can be invested into a Stocks and Shares ISA; or alternatively those with a keener investment interest may be happy to hear that they are eligible to invest the full allowance into a Stocks and Shares ISA.

Cash ISAs offer a number of features designed to suit different needs, so whether you require access to your savings or you are happy to lock them away in order to benefit from higher rates, there are plenty of options available.

ISAs work best when they are left to grow, so it will pay off to leave your savings untouched. Any funds that are withdrawn can’t be replaced, so once your ISA allowance has been used up, you won’t be able to add any funds until the following tax year.

Shopping around

Despite rates failing to rise for 15 months, there are still some attractive deals to be had, with some offering respectable rates.

Comparing a number of accounts offered through a number of providers will allow you to choose the most appropriate account for you, while also getting the best rates. Finance comparison website Which4u.co.uk compares a range of ISAs from several different providers, both instant access and fixed rate, allowing you to compare the best deals on offer.

What to remember

The higher paying ISAs usually come with an introductory bonus rate which expires after 12 months, so it’s essential to stay on top of your savings account and switch to a new provider once the rate drops.

Transferring ISAs is easy, but you must not attempt to move the funds over yourself, as doing so would cause your tax free wrapper to be lost. You should also check with your new provider to make sure that they accept transfers from previous ISAs. (See more about transferring ISAs in our guide.)

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