Where to put your money when you’re saving

The economy, employment and consumer confidence are all down - but the one thing bucking the trend is saving. As people batten down the hatches, it’s not surprising to see savings rise as the economy falls. 

Before the coronavirus pandemic, household saving was at a near 50-year low 1. On average, people were saving around 5% of their income each month 2.  Spending, not saving, was king. But now - in the wake of the pandemic - there is a wide expectation that savings levels will rise.

This is partly due to people cutting back on spending on things like commuting to work and choosing staycations instead of more costly foreign holidays. But it’s also due to people feeling uncertain about where the pandemic and the economy could go next.

Whether you’re saving for the expected or the unexpected, do you know where you could put your pennies?

When it comes to your savings, there are lots of options, with no shortage of banks and other financial institutions willing to offer you a home for your money. Here we give you a summary of four of these options along with some of the possible pros and cons. It’s intended to give you an idea of some of the types of savings options available to you.

The explanations and pros and cons are not exhaustive.

1. Piggy bank

This may be the first place you’ve ever saved. No one really knows why it’s called a ‘piggy bank’, but there’s no denying its continued popularity. A money box, with a small slit in which to deposit your savings, which can be dated back thousands of years.

Pros: A pretty piggy bank could be a decorative addition to any home and saving of loose change is immediate and easy. 

Cons: A piggy bank in your bedroom will struggle to cope with today’s electronic transfer of funds; its capacity is limited; it could be easily stolen; and it won’t provide protection against inflation.

For example, if inflation is at just 1%, £100 stuffed into your piggy bank at the beginning of the year will be able to buy only £99 of goods a year later. Over time, the value of your savings will shrink, even if your piggy stays the same size. 

2. Bank or building society savings account

A savings account with a bank or building society is one of the first places people turn to when saving.

Pros: It might not be as pretty as a piggy bank, but a savings account should present no worries about capacity for all but the very richest. Your money should be relatively accessible and safer too - with the Financial Services Compensation Scheme (FSCS) protecting up to £85,000 of savings with each banking group 3.

People used to have to pay tax on their interest from a savings account, but the government now permits at least £500 of tax-free interest each year - removing this cost from many savers 4.

Cons: Different savings accounts will often offer different rates of interest, so it’s wise to shop around. However, even by comparing accounts, you’ll struggle today to find a basic interest rate that beats inflation by much, if at all.

In short, a savings account will provide a relatively safe home for your money, up to the limit mentioned above, with easy access. But if you’re looking to ‘turn your acorns into oaks trees’ you’ll have to wait quite some time if the account is your main place for saving.

3. Individual Savings Account (ISA)

ISAs were introduced by the government in 1999 5, to encourage and support saving. Their popularity has resulted in more than 20 million 6 people holding one today. There are two main types of adult ISAs – a cash ISA from a minimum age of 16, and a stocks and shares ISA from a minimum age of 18. These two ISAs represent more than 90% of all money saved in adult ISAs 7.

There’s also the Junior ISA, the Lifetime ISA and the Innovative Finance ISA - but given their niche use, we don’t comment on them here.  

Pros: Like a savings account, with the cash ISA your savings are held by a regulated financial institution. Any money in either ISA should be easily accessible. Also like a savings account, the cash ISA pays interest on your savings - and this interest is tax-free. Unlike the cash ISA, the stocks & shares ISA invests your savings - as the name suggests – in stocks and shares.

This opens your ISA to the potential growth of its underlying investments, but also means its value could fall as well as rise and you could get back less than you paid in. Unlike the cash ISA - which could have a fixed interest rate – there’s no fixed ceiling, or floor, to the return of a stocks & shares ISA. But like the cash ISA, any investment growth in the stocks & shares ISA is tax-efficient.

Cons: The cash ISA could struggle to pay an interest rate that exceeds inflation. Like with savings accounts it’s therefore important to shop around for the best deal and to understand that what your money could buy could fall due to inflation. With a stocks & shares ISA there is an element of financial risk involved with your invested money.

As we’ve said, its value could fall as well as rise. For this reason, most people see the stocks & shares ISA as a saving vehicle for the longer term of five years or more.

For both ISAs there’s also a limit to how much you can save each year. This maximum is currently £20,000 each tax year - but this can be split between a cash ISA and a stocks & shares ISA.

4. Pension

Pensions have never been more popular, with more people using them to save for their retirement than ever before 8. They represent the biggest home of private wealth in the UK, holding an incredible £6 trillion 9. Few may feel excited about pensions, but they matter to millions.

Pros: Like the savings account and the ISA, pensions are regulated financial products. The government is keen for people to save in pensions, so it offers tax incentives to make them more attractive.

For every pound you save in a pension the government gives you a boost, in the form of tax relief. And when you take your savings from your pension, you’re typically eligible to take up to a quarter of your savings tax-free.

These two tax benefits can’t be matched by other savings products. Employers are also keen for people to save in a pension. So, if you’re eligible, and you save in a workplace pension, it’s likely your employer will contribute too.

As with stocks & shares ISAs, your savings will be placed in underlying investments. This opens your pension savings to the potential growth of their underlying investments, with no fixed ceiling, or floor, to the investment return. 

Cons: Pensions are designed to help you save for your retirement. You cannot access your pension savings until the age of 55, at the earliest. As there’s an element of financial risk involved with your invested money in a pension, the value of your savings in a pension could fall as well as rise and you could get less back than you paid in.

Like a stock & shares ISA, the pension is typically a savings product for the longer term. There’s also a limit to how much you can save in a pension. But for most people, this is not a consideration. In each tax year, most can save up to £40,000 in a pension. And over your working life you’re permitted to amass the equivalent of £1 million in a pension. If you move beyond these ceilings, you’re likely to incur a tax charge.

With any financial decision, we always recommend you properly research the product that’s right for you. And when making decisions about your pension or investment it’s important to seek financial advice, so please speak to your financial adviser. If you don’t have one, we can put you in touch with one. 

Call us on 0800 302 9656, Monday to Friday 9am-5pm.

Contains public sector information licensed under the Open Government Licence v3.0