Regular-savings accounts

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Guide to regular savings accounts

Want to save up for something special?

Perhaps you want to gradually put money into an Individual Savings Account (ISA) or learn how to budget savings into your monthly spending?

Even if you're just looking for an attractive interest rate, a regular-savings account could be right for you.

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What is a regular-savings account?

Regular-savings accounts require you to pay in a set amount of money each month, typically ranging between about £25 and £250.

Minimum and maximum payments do vary, however; they may be as low as £10 or as high as £400, or even more.

These accounts often have quite tight restrictions - if you don't make the minimum payment each month the account may be closed, or you could face another penalty such as a lower interest rate.

You may only be able to make a limited number of withdrawals and some accounts make you specify exactly how much you intend to pay in each month, although others offer more flexibility.

On the plus side, regular savers often offer some of the best interest rates available.

It's important to check this though - some regular-saver accounts might have returns that are no better than many easy-access accounts.

On 8 December, 2014, 60 regular savings accounts listed on the matrix of independent financial researcher Defaqto had headline interest rates ranging from 0.1% to 6%.

Despite the wide range, 46% of these regular savers had a competitive headline interest rate of 2.5-6% and just 7% of accounts paid less than 1% interest.

Who are these accounts good for?

A regular-savings account can be a great way for a new saver to get into the habit of putting money away each month.

The possibility of losing the headline interest rate can prove enough of a threat to help keep people saving.

They are also useful for anyone wanting to drip-feed their money into a savings account, or simply those looking for a structured way to save over a year.

What are the downsides?

Although the interest rates can be eye-catching, it's worth remembering that you won't be getting that rate for a full year on the full amount you've committed to saving.

That's because you'll be drip-feeding the money into the account rather than depositing a lump sum.

You should also bear in mind that many regular-saver deals become standard savings accounts after 12 months, at which point the interest rate will almost certainly plummet.

If you don't bother to compare and switch at that point then you could end up earning a much lower return.

Remember your emergency fund

Certain accounts can also be quite restrictive, so it's important to understand exactly what you're allowed to do with your money.

For example, some regular-savings accounts don't allow you to make any withdrawals over a fixed period, perhaps 12 months.

If you're saving into the account as an emergency fund then you really need to have access to the money in a crisis, so locking it away isn't for the best.

If you know that you'll sometimes want to save a larger sum of money than is allowed, then a regular-savings account may not be right for you.

And if you have a lump sum you want to save up front then you probably need a different product.

For example, you can still put your money out of reach and earn a competitive rate of interest with a fixed-rate bond.

Just make sure you still have access to an emergency fund; don't lock all your savings away.

Regular-savings ISAs

Individual Savings Accounts (ISAs) work in much the same way as normal savings accounts, but you don't pay any tax on the interest you make.

A regular-savings ISA is one way to use your tax-free allowance in a year, but there are a few things to think about before committing.

Most importantly, remember that you can only open one Cash ISA in a given financial year and - if you make that one a regular-saver account - the terms and conditions may mean that you're not able to pay in enough to use your entire tax-free allowance.

For example, if the maximum you can pay in every month is £400 you'll only be able to put in £4,800 over the course of a tax year - a figure that falls far short of the maximum ISA allowance.

It is possible, of course, to put the rest of your allowance into a Stocks and Shares ISA and, from April 2016, you can also consider the Innovative Finance ISA.

It may also be worth thinking about opening a non-ISA regular-savings account and - when the bonus rate for that account ends - using the money accumulated to help fund an ISA.

Regular saving through peer-to-peer lenders

Some peer-to-peer lenders such as RateSetter allow you to pay in through a regular-saving plan, but such an arrangement is likely to be under your control and not subject to the same restrictions as other sorts of regular-saving accounts.

Each sum you pay in should be treated as a new deposit, meaning there are unlikely to be restrictions committing you to maintaining these regular payments over a period of time.

Peer-to-peer investments carry more of a risk than savings products, but drip-feeding money in through regular saving is one way to help counter the risk and the possibility of fluctuating returns.

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