Step 3: The saving and investment accounts you need to know
Remember being taught about the different types of savings and investment accounts in school? Neither do we. It’s easy to get overwhelmed with the jargon around ISAs, LISAs, SIPPs and notice accounts but choosing the right account could mean the difference between maximising your savings potential and missing out completely. Here’s a simple overview of the main accounts you need to know, how they work and how you can use them to your advantage.
Traditional Saving Accounts
A traditional savings account is where you put your money to earn interest. Different from your bank / current account that allows you to withdraw cash, pay bills and spend using a direct card, a savings account is solely there for you to save and accrue interest. The Personal Savings Allowance allows basic-rate taxpayers to earn up to £1,000 savings interest before being taxed. There are a few different types of savings accounts, set out below.
Easy-access accounts – here you’ll be able to quickly access your money. You pay into them, earn some interest on your savings and can withdraw whenever you want (although some accounts do limit the number of withdrawals you can make). So if your boiler breaks or you need an emergency income for a few weeks, you’re able to access this money easily. If you already have emergency savings, other accounts, such as Notice or Fixed (see below), tend to pay higher interest rates in return for less withdrawal flexibility.
Notice accounts – with a notice account, you’ll need to give the specified notice period in order to withdraw your money. Usually, the longer the notice period the higher the interest rate and you’ll mostly find these are variable rates, meaning the provider can change the rate at any point, though they will give you reasonable warning of this. Withdrawal notice periods may be as little as three days or even up to 200 days. Moneybox offers a 95 Day Notice Account with a great interest rate!
Fixed-rate accounts – these give you the option to lock in an interest rate for a set period of time. The catch here is that you normally can’t take your money out during the term. This includes switching to another type of account to take advantage of any rate rises. While you are locked in for your fixed period, again you’ll most likely benefit from a higher interest rate.
ISAs, LISAs, JISAs, GIAs and SIPPs
Individual Saving Accounts (ISAs) are just an alternative savings account, where you never pay tax on any interest earned. Everyone aged 16 and over in the UK gets an ISA allowance and you can only open one type each tax year (i.e. you can’t open two Cash ISAs in one tax year). For the 2020/21 tax year, the allowance is £20,000, which you can spread across all the different types of ISA.
Cash ISA – a savings account which allows you to earn interest tax-free. There are a range of different types of Cash ISA (easy access and fixed term), so you can choose the one best suited to your short term goals.
Stocks & Shares ISA – allows you to invest in the stock market, while benefiting from tax-free investment returns (provided you meet some tax requirements). Investing is for the longer-term and is higher risk as the value of your investment may go down as well as up, but with higher risk comes potentially higher rewards than cash savings.
Lifetime ISAs (LISA) – designed to encourage people to save for their first home or retirement, the government offers a bonus of 25% on top of your tax-free savings up to £4,000 each tax year. So you could get up to £1,000 of free money each year you save! More on the Lifetime ISA below.
General investment Account (GIA) – a way to hold your investments outside of tax wrappers such as pensions and ISAs. A GIA doesn’t offer tax relief but you only pay tax on gains above £12,300, subject to having no other investments.
Junior ISAs (JISA) – an account that a parent or guardian can set up and contribute to for their child up to the age of 18. The JISA is free from any income or capital gains tax and can be opened as a Cash or Stocks & Shares JISA. Money saved into a JISA can only be withdrawn by the child after they reach the age of 18, not by the parent or guardian.
Self-invested personal pensions (SIPP) – a pension ‘wrapper’ that holds investments until you retire and start to draw a retirement income. A SIPP is a private pension that you can open directly through fund providers or through companies like Moneybox. You have more control over where your personal pension is held, as well as what funds it invests in. We cover the importance of pensions within your saving and investing journey in Step 5.
When choosing which account is right for you, it can be useful to break down your savings and cascade them out into a plan that suits your goals – like a champagne fountain at a party, when the top one is filled, you save into the next.
Rainy day & emergency savings
Laura Whateley, author of Money: A User’s Guide, recommends setting aside at least £1,000, or three months’ worth of expenses, in case you need to access cash quickly. If the global events of 2020 have shown us anything, it’s that having an emergency pot of savings is so important for when the unexpected occurs. We asked the Moneybox community “what’s the one money lesson you’ve learnt during lockdown?”, and the overwhelming top response was “I should have saved more in an emergency pot”. An easy-access or very short-term notice account could be best for these savings, as you’ll have flexibility when it comes to withdrawing money.
Once you’ve got your rainy day buffer, and made sure you’ve paid down any debt, then it’s time to move onto your goals…
First home savings – did someone say free money?!
Saving for your first home? The Lifetime ISA has been called a no-brainer for first time buyers as it offers free money from the government! Here’s how it works:
Introduced in 2017, the Lifetime ISA is designed to encourage people to save for their first home (or retirement) and offers a government bonus of 25% on top of the tax-free savings. This means that for every £4 you pay in you get £1 for free. You can save up to £4,000 per tax year into your Lifetime ISA, giving you a potential bonus of £1,000 each year you save! You need to be between the ages of 18-39 (inclusive) to open one and you can’t withdraw the money without paying a charge unless you use it for a first home (up to £450,000) or retirement.
The Lifetime ISA can be opened as a cash or investment account. With Moneybox, you can choose to save into a Cash Lifetime ISA and earn a great interest rate on top of your contributions and bonuses, or contribute to a Stocks & Shares Lifetime ISA and invest your money in the stock market. If you’re looking to buy your first home within the next five years, cash savings may be your best choice. If your time horizon is a little longer, the Stocks & Shares LISA could be a great option to boost your savings by benefiting from higher returns. With investing it’s important to remember the value of your investments can go up and down, and you may get back less than you invest.
The government has temporarily reduced the Lifetime ISA withdrawal charge from 25% to 20% between 6 March 2020 and 5 April 2021. This change has been made to support people whose incomes may have been affected by Covid-19, but applies to everyone. You can learn more about the Lifetime ISA as we break down everything you need to know in our blog post, including the reduced withdrawal charge.
It can be tricky to work out just how much you should be putting away each month in order to buy your first home. There’s no ‘one size fits all’ as it will depend on your individual financial circumstances and property search. Moneybox Cash LISA savers can use our simple in-app house deposit calculator to help them get started. By setting your house deposit goal and when you hope to buy, we’ll tell you how much you need to save each week, helping you get on track to reach your goal of home ownership.
Short term goals
Most savers will have short term goals they’re aiming to achieve. Whether it’s a holiday, new car or home renovation, being smart about where you hold these savings is key. As you’re more likely not to need these funds tomorrow, looking into higher interest paying accounts are a great place to start. New research claims that £173bn of savers’ cash is sitting in accounts that pay no interest at all. These savers could be missing out on more than a billion pounds by leaving their money in here and not switching to higher interest accounts. Notice and Fixed accounts usually offer better interest rates in return for holding your money for a period of time.
Long term goals
Investing can be a great way to grow your money and can offer higher long-term returns than leaving your money in a current or savings account. A Stocks & Shares ISA is one of the most popular investment accounts, with General Investment Accounts also available. Learn how to invest like the best here in Step 4.
Lifetime ISA – There is a 20% government withdrawal charge unless you use the money towards buying your first home (up to £450,000) or for retirement (from age 60), meaning you will lose any government bonuses you have earned. Please note this is a temporary reduction from 6 March 2020 – 5 April 2021. After this period the government withdrawal charge will revert to 25% (you’ll pay an additional £6.25 for every £100 deposited). The Lifetime ISA is treated differently for tax purposes when compared to a pension. If you decide to opt out of your workplace pension and instead pay into a Lifetime ISA, you will not benefit from any employer-matched contributions into your LISA and it may affect your current and future entitlement to means-tested state benefits. If considering the Lifetime ISA for the purposes of retirement, we recommend you speak with an independent financial advisor.
Personal pension – Please note Moneybox cannot accept a pension you’re currently paying into or any old pensions that provide guaranteed benefits when you retire.