As the UK continues to battle a cost of living crisis, savings are more important than ever, but how exactly do savings work and what’s the best way to save?
If you’re unsure on the different types of savings, how much you can put into savings accounts and what the difference between savings and investment, investment platform Saxo is on hand to answer all of the above and more.
Here are the answers to some of the most common questions on savings:
- What are savings?
Savings are an amount of money accumulated by an individual over time after subtracting their consumer spending from their disposable income. Savings are usually made up of money you don’t plan to spend right away but can also be withdrawn from your account whenever needed.
- How do savings accounts work?
Savings accounts provide a place to put your money that isn’t used for day-to-day spending. There are several different types of savings accounts but most accounts mean you earn money from your savings based on the accounts interest rate.
- What are the different types of savings accounts?
Instant-access– You can take money in and out of these accounts whenever you please
Limited-access- These usually offer a better interest rate but there is a limit on how many withdrawals you can make to keep that rate.
Fixed-rate- The interest rate on these accounts is fixed for a period of time so it doesn’t go up or down and on some fixed rate accounts, you can’t take out your money before the term ends..
- How much can you pay into a savings account?
There’s no limit as to how much you can put into a savings account.
- How safe are my savings?
The main protection is from the Financial Services Compensation Scheme (FSCS). It was set up to cover people’s savings in the event that a bank were to go bust. If you hold money within a UK-authorised bank that goes bust, the scheme will automatically compensate you up to £85,000 per eligible person, per bank, building society or credit union.
- Are savings taxed?
Savings in the United Kingdom can be subject to taxation, but the way they are taxed depends on various factors, including the amount of interest earned and your overall income. The Personal Savings Allowance allows most individuals to earn a certain amount of interest on their savings tax-free, the exact amount depends on your income.
- How do interest rates affect savings?
The Bank of England has held interest rates at 5.25% which can have a significant impact on savings, influencing how your savings grow over time. When you deposit money in a savings account you earn interest on your savings. The interest rate determines the amount of interest you receive. A higher interest rate leads to more significant savings growth, while a lower interest rate results in slower growth
- What’s the difference between savings and investment accounts?
Both involve setting aside money but savings are a good way to achieve short-term goals, while investing are best for long-term growth generating returns. With some investment brokers, such as Saxo, you can have an investment account that allows your non-invested money to earn interest as you wait to invest as opportunities arise.
- Do savings require credit checks?
Savings accounts do not require credit checks but banks may perform one to confirm your identity. You should not be declined from opening a savings account because of a poor credit score.
- Can you open a joint savings account?
Yes. When completing an application, most savings providers allow you to choose to open the account solely or jointly. If you choose a joint account, both account holders will have access to the account, the same as if it were a sole account.
- What’s the difference between an ISA and a savings account?
The main difference between an ISA (Individual Savings Account) and any other savings account is that it offers tax-free interest payments. There are different types of ISAs, including cash ISAs, stocks and shares ISAs, and innovative finance ISAs. The interest or returns earned within an ISA are typically tax-free.Your choice between the two will depend on your financial goals, risk tolerance, and the amount you wish to save or invest.