We probably all had a piggy bank as children where we’d save up our pocket money until we could take a trip to Woolworths to buy our favourite band’s latest LP or video game for the
But by the time we’d reached secondary school, most of us would have thrown away that little piggy as we moved on to receiving a weekly pay packet from a paper round or Saturday job.
I suspect that, like most of you, I spent those few pounds almost as quickly as I received them. But, if I could turn back the clock, I’d tell my 16-year-old self to keep stashing those pennies awayin a safe place.
It’s never too early to think about saving money for the milestones that we all reach in life, whether it’s trying to get on the property ladder, planning for our children’s future or looking
towards retirement. Saving regularly – even a relatively small amount – can make a huge difference when it comes to making a significant purchase, whether it be your first home or your first car. Despite schemes like Help to Buy making the prospect of buying your first home more realistic for many young people, it’s impossible to get a mortgage without some form of deposit.
So, as soon as you can, you should start making regular contributions to your savings pot. One of the most tax efficient ways to save is through an Individual Savings Account, which is more
commonly known as an ISA.
The main difference between this and any other type of saving account is that interest payments are tax-free. Put simply, you get more bang for your buck. You can save up to a maximum of
£20,000 a year and never pay a single penny in tax, whereas on a standard savings account you’d pay 20% on the interest earned above your £1,000 personal savings allowance. That assumes that you’re a basic-rate taxpayer – higher-rate taxpayers would have to pay 40% above their personal savings allowance.
What’s more, any interest accrued on an ISA does not count towards your personal savings allowance, so it’s a win-win situation. The most common type of ISA is a cash ISA, but there are
also innovative finance ISAs, stocks and shares ISAs and Lifetime ISAs to consider*. Note, however, that the annual tax-free allowance is £20,000 across all ISAs and not per ISA.
How much more your savings can earn in an ISA compared to a standard savings account depends on different factors such as the amount in the account and the interest rate, but ISAs are known to perform significantly better than cash in the bank.
One thing that I never considered as a teenager was the cumulative effect of regular savings. I just though that savings were savings – I never thought about the impact of getting interest from the interest I’d already earned.
Since entering the financial services industry, I’ve come to learn that this is called compound interest. Although it sounds like there could be some sort of magic involved, it is actually a very simple concept to understand.
So – entirely as an illustrative example – if you were to save £1,000 over the course of a year and at the end of that first year accrued £20 in interest, the following year you would get interest on the £1,000 and the additional £20 too.
There’s a saying that if you look after the pennies, the pounds will look after themselves. Perhaps saving only pennies in the long term won’t help you buy a home but popping 50p a week into a piggy bank does encourage children to develop positive saving behaviour and habits that will set them up for life.
Elaine Clunie is Business Director and Financial Adviser with Buchan Wealth Management, a Senior Partner Practice of St. James’ Place Wealth Management.
The value of an ISA with St. James Place will be directly linked to the value of the funds selected and may fall as well rise. You may get back less than you invested. An investment in a Stocks and Shares ISA will not provide the same security of capital associated with a Cash ISA.
The favourable tax treat treatment of ISAs may not be maintained in future and is subject to changes in legislation.
*Innovative Finance ISAs and Lifetime ISAs are not available through St. James’s Place.