With strict limits on going out and about, lockdown has helped many people build their savings. Last year, in total, households put away almost three times as much money as the year before, according to an analysis of Bank of England figures by the investment firm Hargreaves Lansdown. It found that in the year to March 2021, £184bn flowed into savings accounts.
For some of those who have been able to carry on working through the coronavirus lockdowns, this has been their first opportunity to start accumulating some savings.
Others have had a tough time of it, and research issued this week by Yorkshire building society found that about a fifth of UK adults have less than £100 in savings.
As the economy begins to open up again and people are increasingly free to spend in a similar way to before the pandemic, how can those who have built up savings keep hold of some of that cash, and keep the habit going? Plus, what are the top tips for those who would like to start putting something away?
Locking away your gains
If you have spent the last year building up savings and don’t want to blow it all, a good approach is putting some of it out of the way of temptation. Don’t do that before you have cleared any debts you have, particularly any fairly high-cost ones. There is no point earning a little on your savings and paying a lot on your credit card borrowing.
Interest rates on savings accounts have tumbled since the Bank of England cut the base rate to a record low of 0.1% in March 2020, so returns are low. However, there was a bit of good news this week: the financial information site Moneyfacts reported that the “spiral” of cuts to savings rates had halted, with all average rates either rising or remaining unchanged this month for the first time since October 2020.
While some instant access accounts are paying only 0.01% on deposits, locking away your money offers the potential for a better return. Accounts known as fixed-rate bonds or fixed-term deposits run for a set period. Most banks offer them over a range of timescales, typically from one year to five, and most offer a fixed interest rate over that period.
As a rule of thumb, the longer you lock up your money for, the better the rate. Anna Bowes of the website Savings Champion says one of the best rates on offer is from UBL, which has a five-year fixed-rate bond paying 1.55% interest. This requires a minimum deposit of £2,000. For those who don’t want to commit their money for so long, Zopa pays 0.9% on a one-year fixed bond. To open this one, you need at least £1,000 to deposit.
Be aware that once you commit your money to a fixed-rate bond, you cannot normally access your cash until maturity – that is, the end of the fixed term. “You should only tie up what you know you won’t need access to,” Bowes says. “Occasionally a bond will allow access but that will come with a hefty penalty equivalent to a certain number of days’ interest. This could wipe out all the interest paid and possibly even mean getting back less than deposited if the money is withdrawn very soon.”
One strategy if you are wary about committing money for several years is to adopt a “savings ladder” approach. This is where you split savings across bonds of different length so you can get some of the better rates and not commit money for a lengthy period. Whether this is an option will depend on how much money you have and the minimum sum you can invest in each bond.
You could also look out for accounts that limit withdrawals. For example, Nationwide building society has an account that will let you make three withdrawals a year and after that cut the interest it pays – it is not exactly locking up the money and throwing away the key but it may make you think twice about dipping into it. Its 1 Year Triple Access Online Saver 12 currently pays a rate of 0.45%, which will fall to 0.01% if you make a fourth withdrawal. It can be opened with anything from £1.
At Barclays, the 2-Year Flexible Bond offers up to three withdrawals over the entire term, capped each time at 10% of your initial deposit. You can open it with £1 but you cannot add to it later. The interest rate is fixed but, at 0.25%, is lower than you would earn if you sacrificed the ability to make withdrawals.
Premium bonds are another option for putting money out of easy reach. These are investment products from National Savings and Investments where instead of interest, savers are entered into a monthly prize draw in which they can win between £25 and £1m. The odds of any one £1 number winning a prize were cut last December from 24,500 to one to 34,500 to one – so the chance of winning with a small balance is small but one of the main benefits is that they are secure because they are backed by the government.
Keeping the savings habit
As shops, offices and places to go out continue to reopen over the coming weeks and months, many of us will see our spending increase, and less cash building up in our bank account. But it may be possible to keep saving a meaningful amount each month.
Damien Fahy, the founder of the personal finance website MoneytotheMasses.com, says those who want to continue saving “should try to maintain their lockdown lifestyle as much as possible and avoid ‘lifestyle creep’, which is where you begin to live to, and often beyond, your means”.
Start with a budget: write down your income and then all of your monthly spending to the last penny. Budgeting apps such as Emma and Money Dashboard can link up to your bank account and track your spending.
“Make sure that once you’ve fixed your budget, you also pay yourself first, which means committing to saving a set amount a month by making it one of your ‘bills’ that is paid immediately after each payday,” Fahy says.
This money could be channelled into a regular savings account. Returns on these accounts will not make you rich. However, they are a good way to build up a savings habit. Typically these accounts will accept an initial deposit, then let you set up a standing order for the same sum each month. Usually there is a minimum and maximum you can pay in each month.
Moneyfacts says one of the best deals at present is NatWest’s Digital Regular Saver, which pays 3.04% on balances up to £1,000 – although that is only available to the bank’s current account customers. It accepts monthly payments of £1 to £50, and allows you to adjust or top up the sums.
Yorkshire building society has the Loyalty Regular Saver account for its existing customers, which pays 3.5%, but to be eligible you need to have been with the mutual since January 2020. This account is open to customers aged 11 and over, and you can pay in up to £500 each month for a year.
Bowes says one of the top-paying accounts of this type that is open to all is Coventry building society’s Regular Saver (5), paying 1.05%, which will run for 12 months and accept a payment of up to £500 a month. However, she highlights that this is a variable interest rate, so it could be changed in the future.
She also highlights Bath building society’s 16-25 Regular Saver, which is paying 4% but is only open to those aged 16 to 25 who live, work or study in the city. It accepts deposits of between £10 and £50 a month.
It is worth noting that when you pay into a regular saver over a year, your return on the total will work out at about half of the headline annual interest rate because only the sum invested at the very beginning will have been in there long enough to earn it. The rest of your money will earn a proportion of it.
Starting to save
If you are not fortunate enough to have been able to save over the past year, you may be keen to have some money in the bank in case we face any future shocks. Typically, the advice is that an emergency fund of between three and six months’ salary is wise but Fahy says the pandemic has led to suggestions that people should have up to 12 months’ money set aside.
One way to start working towards an emergency fund is to use the rounding-up function in apps, where money is shifted from your account to a savings pot every time you spend money. An app such as Moneybox rounds up to the nearest pound and accumulates the spare change, while the digital bank Monzo allows for the same on its accounts. The advantage is that sums you may have thought not worth putting aside can add up over time.
For anyone on a low income, the government’s Help to Save account may be an option. Open to certain people on working tax credit or receiving universal credit, it offers a 50% bonus on savings, up to a maximum of £1,200 in bonus money over four years. The bonus is paid every two years and the accounts run for four years in total. The account is available through the government website. It is quite complicated and if, with other accounts you have, it pushes your savings above £6,000, it could have an impact on the benefits you can claim, so make sure you read the details carefully before you start paying in.
Young people who have built up savings in their current account or a low-paying easy access account could consider rehoming at least some of the cash in a lifetime Isa. These let you save for either a first home or retirement and offer a good deal, although there are inevitably strings attached.
You can put away up to £4,000 each year until you are 50, and the government will add a 25% bonus to your savings, up to a maximum of £1,000 a year. However, to open a lifetime Isa you must be aged 18 to 39.
“This account is most often used to save for buying a first home, and therefore access could be needed at short notice. This means that a cash lifetime Isa is likely to be more appropriate,” says Alex Shields of the financial advice firm The Private Office.
Moneyfacts says the highest-paying cash lifetime Isa at present is offered by the Moneybox app, and has an interest rate of 0.85%.
Jason Hollands of the financial advisers Bestinvest says these accounts are worth looking into for buying a home but not necessarily as a method for financing retirement.
“Lifetime Isas do not offer the same flexibility of normal Isas, and pensions are more attractive as a retirement savings vehicle, so if buying a first property isn’t your goal, this may not be the right account for you,” he adds.
When you turn 50, you will not be able to pay into your lifetime Isa or earn the 25% bonus. Your account will stay open and your savings will still earn interest or investment returns.
The money invested can be withdrawn if you are: buying your first home (the property must cost £450,000 or less and you need to be buying with a mortgage); aged 60 or over; or terminally ill, with less than 12 months to live.
You must pay a penalty – currently 25% – if you withdraw money for any reason other than the above.