There are several ways you could choose where to keep your savings, depending on your goals. It’s important to do some research to make the right choices for your circumstances. You may wish to consult a financial adviser to help you with this – there’s likely to be a cost for advice.
Here are a few examples of where you could put your money:
Easy-access savings account
This is a bank account where you can access your money as and when you need it. In terms of savings, this is where people might choose to put their rainy-day fund, so they can take money from it in case of emergency.
Pension pots
If you’re saving for retirement, you might choose to direct some of your savings into your pension. Depending on your provider, you might be able to make one-off payments into your pension pot or set up regular additional payments. You may also be able to instruct your employer to increase your pension contribution before you get paid. This means your take-home pay would be less, as you’ll be redirecting some of your earnings into your pension pot.
Remember that your pension pot is an investment. The value of your pension can fall as well as rise and isn’t guaranteed – you may get back less than you paid in.
Individual Savings Accounts (ISAs)
You can save tax-free with an Individual Savings Account (ISA). There are four types of ISAs that may be available to you. You can pay into one of each kind of ISA each tax year. There’s a limit to the total amount you can pay into ISAs within a single tax year – this is known as your ISA allowance.
To see the current ISA allowance, visit the UK government website. Here is an overview of the four ISA types.
Cash ISAs are bank accounts that pay a fixed or variable rate of interest on your savings each year. The money sits in your account rather than being invested. If you choose a fixed-rate ISA, you may not be able to access your money for a set period – such as two to five years – to benefit from a higher interest rate. Some cash ISAs may let you access your money early, but at the compromise of a lower interest rate.
It’s worth noting that the interest rates on a cash ISA may not stay in line with inflation. This means that while the money in your account might grow, it could be outpaced by how quickly the cost of living is rising. It’s recommended to shop around for the best ISA deals that suit your needs.
Otherwise known as an investment ISA, this is where your savings are invested and you don’t have any personal liability to income tax or capital gains tax on any income or growth from these investments. Stocks and shares ISAs are typically used by people who are comfortable locking their money away for a longer period. You can have more than one stocks and shares ISA, but can only pay into one of these ISAs in a single tax year.
Remember, the value of an investment can fall as well as rise and isn’t guaranteed. You may get back less than you invested.
The Lifetime ISA exists specifically to help people purchase their first home or to support them in retirement. You must be over 18 and under 40 to open this type of account. A LISA allows you to pay in £4,000 each year until you’re 50, and you must make your first payment into it before the age of 40. The savings in your LISA can be a combination of cash savings and stocks and shares. This means you can choose to invest some of your money that’s in your account.
Each year, the government will add a bonus of 25% to your savings, up to a maximum of £1,000 per year. You can only withdraw from your LISA if any of the following applies:
- You’re using the money to purchase your first home
- You’re over 60
- You’re terminally ill, with less than 12 months to live
If you choose to withdraw any money early for any other reason, you’ll be subject to a 25% charge, which recoups the money paid in by the government.
General Investment Account (GIA)
A GIA works similarly to an investment ISA, except there’s no limit to how much you can invest within a single tax year. There are no restrictions on when you can access your money in a GIA, although you should be prepared to hold your investments for at least five years, ideally longer.
Any dividends in excess of your tax-free dividend allowance will be subject to income tax, whether the dividends are reinvested or paid to your cash account. Any interest distributions you receive over your personal savings allowance will be subject to income tax.
If you sell an investment, any growth may be subject to Capital Gains Tax (CGT), if you exceed your annual CGT exemption. The amount of tax you will pay will depend on your personal tax situation and may be subject to change in the future.