When you are starting to save, you have several choices about where to put your money. You can save into a traditional savings account or choose a savings bond. We explain the pros and cons of both traditional savings accounts and bonds.
When choosing the best place for your savings, you first need to decide whether you are likely to need the money in a hurry. Different savings accounts allow you to take your money out straight away or require you to give notice before withdrawing or transferring it.
A savings account that you can access straight away is often called an Easy Access Savings account, an Instant Access Savings account, or a No-notice savings account. All this means is that you don’t have to wait before getting hold of your money. You can open a simple savings account with as little as £1 and close it whenever you want.
A savings bond is a financial product in which you invest a set sum of money (usually a minimum of £100 but sometimes up to £5,000) in return for a fixed rate of interest over a set number of months or years. If you keep your money in the bond for the specified amount of time, you receive a guaranteed amount of interest. If you withdraw your money or close down your account early, you will lose some or all of the interest you have accrued.
A savings bond is different from a savings account, because you lock away your money for a set period of time, known as the term. Savings bonds often pay better interest than easy access or instant access accounts, and you usually have to pay in a minimum sum of money to open them. If you want to get hold of your money before the end of the term, you may lose interest.
Easy access to your money
Simple to understand
A good home for an emergency or rainy day fund
You won’t lose any interest if you withdraw your money
Interest rates tend to be relatively low
Current interest rates will not beat inflation
You can access your money whenever you wish – which may not help with your savings discipline
Interest rates are usually better than an easy-access savings account
Your money is tied up for the term, which may help with savings discipline
The interest rate is generally fixed, so you know what you are getting, and the amount you will receive at the end of the term is guaranteed
Your money is tied up between six months and five years, depending on the term
Although interest rates are better than a simple savings account, the difference between the two may not merit tying up your money for a long time
If you buy a fixed rate bond for several years and interest rates go up during that time, the interest rate on your fixed-rate bond will not rise
You may lose interest if you withdraw your money early
You can hold both a savings account and a savings bond, and there are benefits to having both.
It is a good idea to have at least three months’ worth of household costs and bills saved in an easy-access savings account, so that if you need money in a hurry, you can get hold of it quickly.
It can also be a good savings plan to have a fixed rate bond because your money is locked up at a higher interest rate, and you don’t have the temptation of dipping into your savings during the term. However, it is essential to carefully read the terms and conditions of a fixed rate bond to know what you are getting.
Premium Bonds are a popular way to save – but they don’t pay any interest on the money you deposit. Instead, there is the chance of winning a monthly prize up to the value of £1 million.
Premium Bonds are run by National Savings & Investments, which is government-backed. The minimum amount you can put into Premium Bonds is £25. Each bond costs £1, and there is no cost and no commission. The maximum you can have in Premium Bonds is £50,000.
Premium Bonds are not strictly savings accounts because they do not pay any interest, and there is no guarantee that you will win a prize. Although you will not lose any money by keeping your cash in Premium Bonds, the value of your money is likely to be eroded by inflation, especially if you do not win any of the monthly prizes.
A savings bond and a Premium Bond are two very different financial products, even though they are both called bonds. A savings bond pays interest, and your money is tied up for the term of the bond. A Premium bond does not pay interest, but you can access your money whenever you like by cashing in your bonds and transferring the money to your nominated bank account.
There is a lot of debate about whether it is worth having Premium Bonds. Statistically, the chances of winning the £1 million prize is extremely slim. If you only win a couple of smaller £25 prizes, you would probably have been better off putting your money in a savings account or fixed-rate bond instead. There again, many people like the idea that they have a small chance of winning a life-changing amount of money.