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Are Christmas Clubs the best way to save?

Christmas Clubs that claim to help you spread the cost of festivities over the course of a year are on the rise. But what are they, how do you choose the right one and are they really the best way to save?

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What is a Christmas Club?

A Christmas Club is a form of savings scheme, designed to help you spread the cost of Christmas over the course of 12 months, thereby avoiding a last minute spending splurge often funded by credit cards.

How do they work?

Quite simply, you pay something like £2 or more into the scheme each month and, in December, you get your money back. In the meantime, your money is 'locked in' - that is you can't access it until December, so there can be no temptation to blow the lot on a holiday in August.

Actually, it is not entirely true that you will get your money back. In most cases the club will send you a catalogue to buy from using the money you have saved, or you will be sent vouchers that can be spent in certain high street stores.

Will my money earn interest?

In most cases the answer is a resounding 'no'. Your money will not earn interest and you will just get back whatever you paid in over the previous 12 months. Even the Post Office Christmas Club does not pay interest.

Can I access my money in an emergency?

No. As set out above, in most cases, your money is entirely locked in - you simply cannot access it until the start of the Christmas period and, even then, it will most likely to paid to you in the form of vouchers or must be spent via a catalogue sent to you by the club operator.

What if the Christmas Club goes out of business? Is my money safe?

In 2006 the Farepack Christmas Club scheme went out of business, leaving 150,000 members without a penny of their savings. The good news is that the Farepack collapse led to a review of the Christmas Club industry and the establishment of the Christmas Prepayment Association (CPA) - a 'self-regulating' industry body - as well as a 'code of conduct' designed to provide customers with greater protection.

The answer to the question is 'it depends which scheme you choose'. That is, if you choose to join a Christmas Club that is a member of the CPA you will have better protection than if you join one that is not a member. You can find out which Christmas Clubs are members of the CPA by visiting their website.

Should I use a Christmas Club to save for Christmas?

For most people the answer to that question is almost always 'no'. The only possible benefit of saving via a scheme that pays no interest, provides no access to your money in an emergency and offers little flexibility in the way you can spend your savings is that these schemes absolutely stop you blowing your Christmas savings earlier in the year. So, if you are really terrible at saving money for a specific purpose, then a Christmas Club might be for you.

What are the alternatives?

There are a few other options. Here is a rundown of their pros and cons:

Supermarket saving schemes:

What are they? Operated by most of the main supermarkets they usually take the form of a special card, which you can add money to at the checkout each time you visit the store. Most do not pay interest as such, but will provide 'bonus credits' - i.e. extra funds are added to your 'account' each time the balance on your card goes above certain pre-determined thresholds.

What are the benefits? The addition of 'bonus credits' to your account means you are 'in effect' earning interest on your money - though not very much

What are the downsides? You can usually only spend your money in one store - the supermarket operating the scheme. This really limits the potential of these schemes to help you spread the cost of all of your Christmas spending.

Instant savings accounts:

What are they? Instant savers are savings accounts operated by most banks and building societies. All will pay regular interest on your savings and will allow you to pay money in at regular intervals, or whenever you can.

What are the benefits? The main benefits are in the payment of interest on your savings and in the fact that you can access your money whenever you want, for the most part without penalty (aside from the loss of interest).

What are the downsides? Any downsides are pretty marginal and are in comparison to other savings account options. That is, having instant access to your money comes at the expense of a higher interest rate. In addition, you will pay tax on your savings.

Notice savings accounts:

What are they?
Notice accounts are very similar to instant savers, except that you must give notice (anything from two to six weeks usually) before you can access your money.

What are the benefits? You will usually earn better rates of interest on a notice savings account. Again, you will usually be able to pay money in regularly, or whenever you are able.

What are the downsides? First of all, since you must give notice before accessing your money, you must remember to do so in plenty of time - to ensure you have access to your money in time to pay for Christmas. Secondly, you will pay tax on your savings.

Regular Savings Accounts

What are they? As the name suggests, regular savings accounts are those that require you to make regular (usually monthly) deposits.

What are the benefits? These kinds of savings account often offer very good rates of interest for the first year. Normally, that would mean moving your savings to a different account every 12 months - however, this becomes unnecessary if you are saving for Christmas, since you will clearly take most of the money out and spend it each year. Just remember to look for the best deal each year, rather than sticking with the same account.

What are the downsides? In many cases, there are strict limits on how much you can save - either minimum monthly payments into the account or maximum total savings balances, or both. In addition, there may be limits on how much money you can withdraw at any one time and when you can withdraw it. As with any finance product, check the terms and conditions carefully before committing, to make sure you choose one that works for Christmas savings. Finally, bear in mind that you will pay tax on any interest you earn.

Cash ISAs

What are they?
Cash ISAs are savings accounts on which you will not pay any tax. Each tax year (starting April 5th) you get an ISA savings allowance, so they're well worth taking advantage of. The rates of interest paid on cash ISAs varies from provider to provider, so it is well worth shopping around to find the best deal.

What are the benefits? There are many benefits to putting your money in an ISA. First of all, you will make use of your annual tax-free savings allowance (If you don't use it, you lose it). Secondly, if you shop around, you will be able to find an account paying good rates of interest and which still allow you to access your money when you need to.

What are the downsides? There are not many downsides to using an ISA to save money. However, if you are saving specifically for Christmas, the fact that ISA allowances run from April to April is not ideal. That is, opening an account in April and then withdrawing your money in December would only give you eight months to save for Christmas.

Equally, if you use your entire ISA allowance in those first eight months, you will not be able to put money back in and save for next Christmas until your new allowance begins in the following April.

NOTE: Remember it is vital that you check the terms and conditions of any savings account before you commit - don't just look at the interest rate. In particular, since you will be saving fort a specific purpose and will need the money at a specific time, make sure you pick an account that will allow you to withdraw your money when you need it - and make a reminder note in your diary if you have to give notice before withdrawing your money.

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