Savings and Investments
Opening a savings account will allow you to keep money aside until you need to use them, whereas an investment will be for the intention of growing your money.
Key Takeaways
- Use your personal savings allowance to earn interest tax-free
- Utilise ISAs to continue to earn Interest Tax-Free
- Investing isn't for everyone, seeking advice may offer less risky options
- There are cash-based savings options, such as term deposits, that offer a higher return than instant access bank accounts
- The Financial Services Compensation Schemes protects savers up to a maxiumum of £85,000 per financial institution
There is a difference between having savings for a rainy day and planning an investment. Opening a savings account will allow you to keep money aside until you need to use them, whereas an investment will be for the intention of growing your money.
When reviewing options for your savings and where to put your money for the short-term, cash-based products will likely be the best starting place. If you are looking to save for a longer term. You can consider obtaining further information about investing for growth.
Do not save what is left after spending, but spend what is left after saving.
Personal Savings allowance
The government has set a personal savings tax allowance. That means you can earn interest up to a certain limit, depending on your tax bracket, without paying tax.
The current personal savings allowance allows interest earnings up to:
- £1,000 in interest for a basic rate taxpayer,
- £500 for a higher rate taxpayer.
- There is no allowance for an additional rate taxpayer.
This is subject to change. If you are on track to earn more than the personal savings allowance, you can look into options around ISAs. Interest earned from savings in an ISA is tax-free.
What is an ISA?
The term 'ISA' refers to a tax-free Government approved savings account. 'ISA', is an abbreviation for 'Individual Savings Account'. You are able to pay £20,000 annually into an ISA.
People often refer to the tax-free allowance that you are given for tax-free savings as the ISA wrapper. This wrapper can be applied to cash-based accounts or stocks & shares.
Types of ISA
Cash ISA
When it comes to savings, Cash means no investment risk is involved. You will mainly find cash ISAs offered by Banks and building societies. Cash ISAs can be flexible or fixed, which means you may pay a penalty if you withdraw your money before the maturity period.
Stocks & Shares ISA
A stocks & shares ISA can be managed by you via a trading account or can be managed by a wealth management firm. These services of stocks & shares ISA management can be offered through Financial Advisers. You are able to pay in £20,000 each year for the use of purchasing in the stock market.
The ISA allowance is refreshed every tax year. Be aware, if you withdraw from your ISA you will not be able to repay back in if you have paid in the annual allowance already.
How can Financial Advisers help with savings?
Financial Advisers can help their clients with all aspects of savings and investments. The process begins by assessing the client's level of 'appetite for risk'. Your appetite for risk will help determine what recommendation will be suited to your needs. Generally, that will have an impact on whether an investment is suitable for you.
A Financial adviser will then potentially look at specific savings accounts, investments, and ISAs provided by different wealth management companies and banks to help formulate a financial plan.
Advice is tailored to your goals and annual reviews are undertaken by your financial adviser to ensure the advice is still suitable.
Before choosing to invest your money, remember that there’s always the risk that your investments can go down as well as up. That means you could lose money.
Finding a financial adviser through Sunny Avenue does not mean you are obligated to enter into any sort of financial investment.
The advice provided by the advisers is a recommendation but you will have the final decision on whether to proceed or not.
If somebody reaches out to you to recommend an investment, there is a high chance it is a scam.
Please be cautious when dealing with unsolicited investment advice.
Other types of Savings accounts
ISAs aren't the only way to save but they are a tax-efficient way of saving.
If you are looking for other options for savings and understand the tax implications, there are some other types of savings accounts to familiarise yourself with:
Fixed Rate Bonds/Term Deposits
Fixed-rate bonds usually offer the best rate for cash savings.
You can lock your money away for a fixed period in return for a higher interest rate.
With a fixed-rate bond savings account, you get the peace of mind that your interest rate won't change throughout the fixed period. This is ideal if you are looking for longer-term savings from 1-year fixed bond accounts to 5-year fixed bond accounts.
Notice Accounts
Variable interest with access to your funds after a notice period. Keep your account open for as long as you want. Choose a notice period that works best for you.
Easy instant Access
Variable interest. Instant access. Flexibility over when you top up and withdraw funds.
The FSCS (Financial Services Compensation Scheme)
When searching for a new savings account provider, look out to ensure they are FSCS protected.
The Financial Services Compensation Scheme is the UK's deposit insurance and investors' compensation scheme for customers of authorised financial services firms.
The FSCS can pay compensation if a provider is unable, or likely to be unable, to pay claims against them.
You are covered up to £85,000 per provider.
The FSCS means your money would be protected should the Account provider become bankrupt and unable to return your funds.
You can find more detail on how the FSCS operates at the FSCS website.
What is a savings account?
Savings accounts are generally low-risk cash-based bank accounts that earn interest. The amount of interest is based on how long and how much you have deposited. Some accounts offer full flexibility, whilst others set rules that mean you cannot withdraw without facing a penalty.
What is a cash ISA?
Cash Individual savings accounts (cash ISA) are similar to cash-based bank accounts with the benefit of tax-free savings. That means you do not pay tax on the interest earned from an ISA. There is an annual limit to how much you are able to deposit into an ISA and you are only able to subscribe to one ISA, each tax year.
What is a fixed rate cash ISA?
Fixed rate cash ISA's are similar to cash ISA's in that you can earn interest tax free. The key difference with a Fixed ISA is that you lock your money away for an agreed period, in exchange for a more competitive interest rate. Should you withdraw your money before the agreed fixed term you may face a penalty of your interest.
What is a lifetime ISA?
The lifetime ISA (LISA) is a savings account with tax free interest. It is designed for people either buying their first home or saving for retirement. The lifetime ISA allows you to save up to £4,000 per financial year , the government then adds 25% to your LISA, up to a maximum of £1,000 per year. The money you put into a LISA counts towards your ISA allowance. You pay a penalty if you withdraw the cash before Exchange of contracts or Retirement.
What is the current ISA allowance?
The current ISA allowance for 2022/23 is £20,000.