Making the right choices for savings

With low interest rates and high inflation, trying to save is becoming increasingly hard, in particular for people on relatively low incomes. This makes it extremely important for potential savers to find the most suitable option available to them.

There is a vast range of possible options, including flexible easy access cash accounts, so-called notice accounts that require a certain period of notice before withdrawals can be made, or fixed term savings accounts, often referred to as bonds, where no withdrawals are possible until the end of the pre-determined term.

Interest rates between these accounts vary, as do minimum deposit requirements. While some accounts can be openend with a first deposit of no more than £1, others require an initial deposit of at least £1,000.

Among the myriad of possibilities, the so-called ISA, or Individual Savings Account, is currently offering the best savings rates around. Although both the instant cash ISA and the fixed term ISA have a limit as to how much can be placed into them per year, they do also have the advantage of savings being exempt from taxes.

Flexible, or instant cash ISAs allow savers to withdraw money at their convenience, without the likelihood of withdrawal penalties being applied. One year fixed term ISAs, usually requiring an initial minimum deposit of around £500, generally offer better rates. They will, however, incur penalties if withdrawals are made before the end of term.

Savings bonds, usually covering a period of at least two years, offer the best rates, but do not allow any withdrawals at all throughout their specified term. Additionally, most of these bonds have a minimum investment requirement of £1,000, making it unlikely for them to be suitable for low income savers.

Savers should also be aware that many accounts carry bonus rates intended to attract customers. These rates usually apply only for a specific period of time and will then drop, often significantly. This is fine as long as savers are prepared to change to a different account after the initial period is over. Carefully comparing different options is therefore an absolute necessity.