We’ve all been told it’s good to save, but what exactly are you saving for and where should you save it? We explore why it’s a good idea to save regularly from a young age, and show the saving options available to you.
Why bother saving?
There are three main reasons for saving regularly:
- For emergencies: to make sure there’s money available if something unexpected happens, like your car breaking down. Find out more about emergency savings.
- To fund luxuries: this might include a holiday or buying a new car, or things such as a tablet, computer or new phone.
- To live comfortably in the future: although it might seem very far away, once you stop working, your income will go down and you’ll probably have to rely on money you’ve saved to keep up your standard of living.
How to save
If you ever have any money left over at the end of the week or month that you don’t need for essentials, try to save it.
Think about saving once you’ve paid your main bills.
If you find that you can do this, then try to save at least 5% of your income – the more you’re able to save, the better.
Example: Jason earns £320 a week. Once he’s paid for all of his essentials he’s left with £95.
Jason works out that 5% of his income is £16 and puts this into a savings account every week.
This means he then has £79 (£95 minus £16) to spend on non-essentials like going out. Over a year, Jason will have put £832 into his savings.
Where to save
If you pay your money into a bank or building society, they’ll pay you interest on it – see it as a reward for allowing them to look after your money.
Every bank or building society has a range of different savings products and each of them pays different interest rates.
The two most common savings products are ISAs and savings accounts.
ISA (Individual Savings Account)
These are very popular as they are a tax-free way of saving or investing – no Income Tax or Capital Gains Tax is payable on money saved or invested within an ISA (sometimes these are called NISA, the ‘n’ standing for ‘new’).
On many other savings products, you would pay tax on the income you earn and might be liable for Capital Gains Tax on any profits from your investments.
In 2019-20 you can save £20,000 until the end of the current tax year in April 2020.
You can save in cash, invest in stocks and shares, or a mixture of the two.
ISA providers can now offer a flexible facility which will let you withdraw and replace money from your ISA, provided it is done within the same tax year.
Not all ISAs will let you do this and you should check with your ISA provider that your ISA has this function.
This flexibility is currently not available for Junior ISAs or the Help to Buy ISAs.
Don’t forget ISA transfers are still required to move money from previous years ISA subscriptions.
Help To Buy ISA
A new type of Cash ISA was introduced to help first time buyers save towards the cost of buying their first home in autumn 2015.
You can make an initial deposit of £1,000 when you open a Help to Buy ISA and then £200 every month up to a maximum of £12,000.
All savings held within the ISA are tax-free, and the government pays an additional 25% on what you save, provided it’s put towards the cost of your first home.
You must have saved at least £1,600 to qualify for the minimum £400 bonus. The maximum bonus that can be earned is capped at £3,000.
You’ll earn tax free interest on your savings just like with a standard ISA.
These ISAs are limited to one per person rather than one per house. You can’t normally contribute to another Cash ISA in the same tax year.
Help to Buy ISAs will only be available until 30 November 2019. They won’t be available to new savers after this date, but if you opened your Help to Buy ISA before then you can keep saving into your account. You must claim your bonus by 1 December 2030.
Find out more about Help to Buy ISAs.
Lifetime ISA (LISA)
This is designed to help you save for a first home or retirement. There is a 25% bonus paid yearly, up to a maximum of £1,000 per year.
The maximum you can pay into a Lifetime ISA each year is limited to £4,000.
Interest is tax free just like with standard ISAs. They’re limited to one per person.
You need to be aged between 18 and 40 to qualify for a LISA.
There are rules around using the LISA for a deposit on a house – the maximum value of the property must be less than £450,000 for example.
There are also rules around when you can take money out of a LISA. Breaking the rules will mean you’ll lose the bonus.
Junior ISAs, with different limits and some different rules, are available to under 18-year-olds. The maximum amount you can contribute into a Junior ISA in 2019/20 is £4,368 (£9,000 2020/21).
Parents and guardians are able to open these accounts and make savings on behalf of their children, and young people in care will receive a government contribution into their Junior ISA.
If a child was born between 2002 and 2011, they might have a Child Trust Fund (CTF). These can be transferred into a Junior ISA.
If the CTF is not transferred, when a child reaches 18 they’ll still be able to access the money.
Nearly all banks and building societies offer savings accounts that pay some interest, and they all have slightly different features.
There are usually no limits on how much you can save in these each year, and often the more money you put in, the higher the interest rate you receive.
If you’ve used up your saving allowance on your ISA, you might want to open a savings account for any extra money you can save.
How to find the best savings account
There are lots of things to look out for in a savings account to make sure it meets your needs, such as:
- the amount of interest paid
- how quickly you can take out your money if you need to
- the minimum amount of money you have to put in (either to open the account, or each month).
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