Starting to save and invest

If serious saving doesn’t come naturally to you, here’s a quick primer to start you off.

What’s the difference between saving and investing?

These terms can be confusing, as they’re often used interchangeably. However, ‘savings’ is commonly used to mean ‘cash invested with a bank or building society’, while ‘investments’ usually implies higher-risk products such as stocks and shares or bonds. But the definition isn’t clear cut – for example, stock & shares ISAs are often referred to as savings – so always double-check.

Types of savings

Cash savings are low risk but relatively unexciting. Your basic options are these:

  • Regular savings accounts
    Most banks and building societies offer a variety of regular savings accounts, and if you shop around you can often find a good rate of interest – especially if you’re a new customer. For tax on ordinary savings accounts, see below.
     
  • Cash ISAs
    Individual Savings Accounts (ISAs) are just savings accounts that always pay interest free of tax (so the net interest tends to be higher). There is an annual limit to how much you can invest. See our page on ISAs for more information.

    You can also invest in a stocks & shares ISA – find out more about those here.
  • NS&I products
    These include everything from savings accounts to premium bonds. Although they do not tend to offer the best growth rates they are among the most secure, as HM Treasury gives a 100 per cent guarantee on all deposits.

Find out more about each category in the menu on the left.

Tax on savings interest

Interest on non-ISA savings accounts is now largely tax-free for most savers, thanks to the personal savings allowance. For basic rate taxpayers, the personal savings allowance is £1,000 (so the first £1,000 of interest is tax-free). For higher rate taxpayers the allowance is £500. Additional rate taxpayers have no personal savings allowance.

When interest rates are low, this may make cash ISAs less useful for some people. However, when interest rates rise the personal savings allowance may be used up much more quickly.

How your savings are protected

Your savings are protected up to a value of £85,000 per financial institution by the Financial Services Compensation Scheme (FSCS), if they are in UK regulated accounts. This means you will be compensated up to this value if your bank fails. If you have a lot of savings, it is best to spread them between different institutions (making sure they are not owned by the same parent company). Off-shore accounts and non-UK regulated accounts are not covered by the compensation scheme.

An IFA or whole-of-market financial adviser can talk you through all your options and help you put together a savings plan to fit your needs. Find a financial adviser here.

Questions to ask your financial adviser:

  • What should I be looking for apart from the best interest rates?
  • How should I be saving if I have a particular goal in mind?
  • Should I be using a variety of savings types?
  • Are my savings guaranteed if my bank goes under?