Saving money is something that we would all do in an ideal world. However, how and where we save money will be different from one demographic to the next. Pensioners are one group that have particular needs when it comes to their savings. As a pensioner, putting your money away in a suitable place is essential. You will be more sensitive to any losses incurred by not saving money efficiently.
Bearing this in mind, here, we look at what savings accounts are suited to pensioners so that you can be sure that your money is working as hard for you as possible. We look at all suitable types of savings accounts as well as explaining what the requirements of a pensioner often are. In doing so, you can learn which savings accounts are ideal for your individual needs. For, while pensioners will often have similar demands, you will have you own specific needs to address.
Types of Savings Accounts
Here are the savings accounts available to pensioners as well as the pros and cons of each.
Cash ISAs are a tax-efficient account where you can save your money. Interest earned on the money invested in a Cash ISA is not subject to income tax like other savings accounts are. The amount you can put in a Cash ISA changes each year, according to the government’s budget. However, what you have saved in a Cash ISA in the past, will never be subject to tax. Depending on what income tax band you are in, you can save anywhere from 20 - 40% in tax.
The main disadvantage to a Cash ISA is that you can only put a certain amount in each year. This amount may be too small for some pensioners so you may need to find another vehicle on top of this one. Additionally, Cash ISAs have not paid a considerable amount of interest in recent years. However, this could be suitable for you as you may not necessarily need to see your money grow by vast amounts, but need growth to be steady. As a result, it can be a safe bet for your nest egg as well as tax-efficient too.
Stocks and Shares ISA
A Stocks and Shares ISA is like a Cash ISA in that the interest earned on it is not subject to income tax. This is a fantastic advantage if you are trying to preserve your funds now that you no longer have a salary coming in. What is a bonus compared to a Cash ISA however, is that you can put a more substantial sum of money into a Stocks and Shares ISA. It could, therefore, be a suitable place for your savings, if you find that a Cash ISA limit is too low for you. Additionally, a Stocks and Shares ISA can be subject to unlimited gains. The interest earned comes directly from increases in the individual stocks and share investments within the overall ISA account. If you invest wisely, you have unlimited growth potential.
However, the major disadvantage for pensioners of a savings account like this one is that the value of the money invested may go up as well as down. This may not be something you can risk as pensioners have less time to recoup those losses.
Easy Access Savings
Easy Access Savings can be an excellent place for pensioners to put funds if you need to get hold of the money held quickly and easily. They are a product offered by banks and buildings societies that allow you to put money aside for a set amount of interest per year so that your nest egg can grow. Plus, you are not subject to penalties if you choose to withdraw your funds at any time.
However, the trade-off for that easy access is often an incredibly low interest rate, which may be below what you need. At the same time, you may not need to see a high rate of interest. Another disadvantage is if you have substantial savings to invest, there can be a limit to how much money each Easy Access Savings Account permits.
A Regular Savings Account is a product offered by banks for those that want to save a regular amount each month. They tend to pay a headline interest amount that is far higher than any Cash ISA or Easy Access Savings product on the market.
However, as ever, with a higher rate of return, there is always a trade-off somewhere in the product. Firstly, a regular savings account won’t usually allow you to invest a large lump sum initially. If you have a good nest egg built up, this can be a significant disadvantage. This doesn’t stop you from using this type of product, though. You could pay in money from a pension or income from investments, each month instead.
Additionally, it is essential to remember that the interest rate advertised only pays interest on the amount within the account each month. While you may be getting 5% on that account, the overall interest you may earn over a year may be less than if you have a lump sum invested from the start in a Cash ISA with a lower interest rate.
Finally, Regular Savings Accounts often penalise you if you don’t pay anything in one month. You usually won’t receive much interest at all in a month that you couldn’t pay anything into it. If you can’t see yourself making those regular payments, your cash will likely earn more in an Easy Access Savings Account.
Fixed Rate Bonds
Fixed Rate Bonds can be a suitable investment for some pensioners. The significant advantage of a fixed rate bond is knowing how much return you will have on a lump sum over a specified period. Additionally, Fixed Rate Bonds offer you the opportunity to pick a rate of return that is often higher than an Easy Access Savings Account or even a Cash ISA.
However, in terms of disadvantages, you should be aware your money is locked away for the duration of the bond. You will incur severe penalties should you need to withdraw your cash - sometimes resulting in getting back far less than you originally invested. Additionally, the length of the bonds available may not be a suitable investment time horizon for you if you only need cash on a very short-term basis.
Also, Fixed Rate Bonds are subject to income tax like regular Savings Accounts and Early Access Savings Accounts. This may result in the actual return on investment being similar to that of a Cash ISA.
What A Pensioner Needs to Consider When Saving:
When learning about the types of savings accounts available, a pensioner will need to keep the following questions in mind.
- What are your other forms of income?
- Do you want to draw an income from your savings, or do you want to let it grow with interest?
- Do you have a lump sum to invest, or do you want to save regularly?
- How do you want to access your money? Are you happy to use the internet or do you prefer withdrawing cash from a bank?
- What timelines do you have in mind for your savings as a pensioner?
Answering these questions will help you weigh up the pros and cons of each type of savings vehicle.
Issues for Pensioners to Be Aware Of
You must be aware of any withdrawal penalties on your accounts before you open them. How much these penalties are and when you incur them can vary between types of savings and savings providers. Some accounts will require you to stay invested for a certain amount of time before you can withdraw cash without a penalty. Others will require you to save a certain amount each month to receive the maximum interest rate.
What Is the Best Investment for Seniors? - The Bottom Line
In summary, all the above savings accounts are suitable for pensioners, but that doesn't mean that all pensioners are right for each of these savings accounts. A variety of factors will determine the specific needs that you will have. They will include how much money you’re able to save, what your income is and practically speaking how you will access your accounts.