People save for many different purposes like a holiday, a car or a nest egg for family, funeral expenses, a deposit for a house or to supplement retirement. With so many reasons to save there are a variety of saving methods which can be more suitable for the intended purpose.
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Savings accounts are designed to encourage people to save over a long term. All banks, building societies and many other financial institutions offer a range of savings accounts. Although the savings account will be given a brand name, they will generally fall into one of the five main types.
Most deposit based accounts pay interest that will vary between individual banks and building societies, the interest rate paid can also depend on the amount held in the account.
Many savings accounts will have a minimum rate of interest that increases as the amount in the account reaches a certain levels.
Basic Savings account
The traditional savings account will allow you to deposit and withdraw money without giving notice. The interest paid is not as high as some other accounts. Also the interest rate can be higher for larger balances.
A notice account will allow you to place a some of your savings into an account that pays a higher rate of interest than a basic savings account, however you will have to give notice (typically 30 or 90 days) before you can withdraw money without penalty. The actual terms will be detailed in the brochures available from the bank, building society or other institution.
Fixed Term Deposit (or bond)
A fixed term deposit allows you to deposit money for a fixed term, usually one, three or five years. Typically you cannot withdraw any money from the account during the fixed term. If you do withdraw money early you may lose much or all of the interest. At the end of the fixed term you can usually reinvest some or all of the money in a new fixed term account. The rate of interest is usually higher than a basic or notice savings account.
This type of savings account is therefore only suitable if you do not need to access the money during the specified term.
At the end of the fixed term, the interest rate can revert to the same as a basic savings account, so check the terms of the account carefully.
Investment based savings account
This type of account is based around investments such as gilts, stocks and shares or other forms of investment. The values of investments can vary and the amount you get back may be less than you put in, however over the long term there is a potential to get a better return than a purely cash based savings account. Apart from Banks and building societies, these types of account can be offered by other institutions such as Unit Trust Managers.
Some of these accounts offer a guarantee that you will get back (after a fixed term) the amount you put in, whereas others do not. Care is needed to ensure that you fully understand what the account is, how it is invested and the terms of any guarantees.
An ISA is a variation of a savings account where the interest (or investment return) is not subject to any personal taxation.
The total amount that can be put into an ISA is £11,280 for the 2012/13 tax year. Half the allowance may be put into a deposit based savings (Cash ISA) and the rest of the allowance into a stocks and shares.
If you withdraw money from an ISA, you cannot put it back in you've reached
your annual ISA allowance. Therefore if you need to withdraw from an ISA for
a short term, it may be worth considering drawing on alternative savings.