Despite the base interest rate in the UK being as high as 3%, a surprising amount of cash continues to be held in savings accounts that pay 0.5% or less in interest.
In fact, Paragon Bank’s recent research has revealed that £392 billion is held in such savings accounts nationwide, with this insight drawn from the analysis of 34 different savings providers on these shores.
This highlights one of the many challenges facing households in the current economic climate, and it’s important to understand the different type of savings accounts available in 2023 if you’re to get the optimal value for money. These include:
#1. Standard Savings Accounts
Standard savings account are incredibly accessible, as they’re completely free and offered by virtually all banks and building societies.
While the cash that you commit to standard savings accounts is also accessible (you can make regular withdrawals and transfers as and when required), there are usually no limits to how much you can invest here.
As we’ve touched on, however, the rate of return is relatively low with standard savings accounts, with many carrying a fixed interest rate of 0.5% or 1%.
In fact, very few standard savings accounts have an interest rate above 1%, while banks and lenders appear to be loath to apply the full extent of the base rate increase to individual accounts.
#2. A Tax-Free ISA Account
The term ‘ISA’ refers to an individual savings account, while this is a tax-free savings vehicle that typically offers increased rates of interest and encourage your money to do a little more work on your behalf.
With a tax-free ISA, you can also accumulate wealth while shielding it from income, dividend or capital gains tax, so the amount of money that you receive upon withdrawal is optimised.
Ultimately, your ISA allowance affords you an optimal return on your capital and monthly cash deposits, ensuring you get far greater value for money and create a sense of financial security in the medium and longer-term.
Interestingly, the cash in your tax-free ISA is also relatively accessible, while you won’t have to pay for any withdrawals that you do complete.
#3. A Stocks and Shares ISA
A stocks and shares ISA is another viable option, and one that offers increased, long-term gains. However, it also introduces an element of risk, as the managed assets included as part of the account may see their values fluctuate over time.
The good news is that a stocks and shares ISA is completely tax-free, while the potential returns are considerably higher and often average out at above 6%.
What’s more, while you can only pay into a single stocks and shares ISA each year, you are eligible to open separate accounts with a different provider during each financial year if you choose to.
This is a great option if you have knowledge of the financial markets and are willing to commit a little extra capital to boost your eventual returns.
