Making your money work as hard for you as possible is essential - especially when you are nearing retirement or have already stopped working. One way to make your money grow is to open a savings account where the cash you save earns interest to top up any nest eggs. The more you save, the more you earn. Plus, thanks to compounding, the amount you make grows exponentially.
The Post Office offers several savings accounts that may appeal to those looking for a low-risk place to save their money. However, are they actually a good idea even though they are low risk?
Types of Post Office online savings accounts
The Post Office offers three types of online savings accounts. They vary in many ways, which we explore below. However, there is one common characteristic - they are all available online. That is a fantastic advantage for many that you should not overlook. Being able to manage your money from the comfort of your home is a massive time-saver. Plus, it is easier to stay on top of your returns - particularly if you have several accounts with various providers.
The Post Office’s online savings account has some notable features that set it apart from other savings accounts available elsewhere. Firstly, the Post Office Online Saver account allows you to make as many deposits and withdrawals as you like. Moreover, when it comes to withdrawals, you will not be penalised for taking money out, and you will receive interest on the remaining balance. That's in stark comparison to many savings accounts, which often drop their interest dramatically (often to nothing) in the months that you make withdrawals.
However, on the note of interest, perhaps the biggest drawback to the Post Office Online Saver is that it only pays 0.25% gross AER annually, or 0.24% gross monthly. That rate is a fixed bonus rate that you receive for the first 12 months you have your savings account. After the initial 12 months, the rate lowers to 0.01%. Interest is calculated daily, and you get to choose whether you want that interest paid annually or monthly. If you decide annually, the interest is always paid in the March of that year. Interest on monthly accounts is received on the first business day of each month.
This account is only available online - as stated above - meaning you cannot manage your account in person in a branch or by phone at all. The minimum balance to open an account is £1, and you can apply for it online. To do so, you must be over 18, a UK resident with a UK bank account or building society account.
The Post Office Online ISA is a cash ISA and an option for you if you have not used up all of your cash ISA allowance this year. The same advantages of ISAs are available with the Post Office's online version in that your savings will earn interest tax-free. However, the Post Office's product offers an exciting feature where account holders can choose the interest rate they receive from several predetermined options. Currently, the Post Office offers a 0.25% variable rate for easy access and then a couple of fixed-rate rates. For example, for a one year Online ISA with the Post Office, you can earn 0.30%; for two years, you can earn 0.35%.
The obvious advantage to the online ISA over the other savings accounts at the Post Office is that the interest earned is not subject to tax. Given how paltry the interest rate is, much like the Online Saver product, it is a significant benefit that no more money is taken from you in the form of tax. That being said, remember that the Personal Savings Allowance (PSA) is currently set at £1,000 for basic rate taxpayers. That means unless your entire portfolio of savings earns you more than £1,000 in interest a year, you would not be paying tax on it in a tax year anyway. Higher rate taxpayers can make £500 in savings interest per year without paying tax. Additional rate taxpayers do not have an allowance.
You can open an Online ISA with the Post Office for £100. If you ever want to make withdrawals from your ISA, that withdrawal will no longer benefit from the tax advantages of ISAs. The minimum amount you can withdraw from this account is £10. Much like the Online Saver, you need to be a UK resident, but only have to be aged 16 or over to apply. The Post Office will also require your National Insurance number when you apply.
An Online Bond with the Post Office is a product that could be suitable if you are happy to lock away a certain amount of money for a certain amount of time. The Online Bond the Post Office currently offers starts with a 1-year term, but customers can also open 2 and 3 year fixed term bonds. All of these durations are available with interest paid annually or interest paid monthly. The benefit of a bond is that you know exactly how much interest you will earn on your savings over that set amount of time. This can materially ease the complexity of planning for retirement in the future.
The interest that these products offer is currently:
- 1 year at 0.35% gross, interest paid annually
- 1 year at 0.34% gross, interest paid monthly
- 2 years at 0.40% gross, interest paid annually
- 2 years at 0.39% gross, interest paid monthly
- 3 years at 0.45% gross, interest paid annually
- 3 years at 0.44% gross, interest paid monthly
Depending on your circumstances, these returns may seem low, or they may seem pretty attractive. The fact of the matter is that while the Bank of England base rate is close to zero, financial institutions across the industry don't (and won't) offer savings accounts or bond products with high interest rates. The Post Office's rates are broadly indicative of the market - but you may find rates that are a little higher elsewhere or even lower.
What are the benefits of Post Office online savings products?
It is the added benefits of any of these online savings accounts that will entice you to put your money away, given how tiny the yearly and monthly interest rate is. Remember, even though the Bank Of England tries to control inflation by raising rates, the base rate is still at relative historic lows. That's great for people looking to borrow money and take out mortgages to finance a new home, but if you are looking to save for retirement through products like these, you will not attract reasonable interest.
But these products do have customers. And one reason the Post Office will attract customers to its savings products is that all the savings a person has in a bank or financial institution up to £85,000 are safe, as it is covered by the Financial Services Compensation Scheme (FSCS). It means that you could claim what you had saved at a bank or building society even if it failed. Importantly too, the Post Office is an appointed representative of Bank of Ireland UK plc, which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority. That should give users a great deal of confidence whether they use Post Office online banking or go into a Post Office branch to open a current account or a linked account to a savings product.
Many customers who use the Post Office money services also proclaim that the customer care side of things is good with the high street stalwart. Many also like that the eligibility for any of the above online accounts are not difficult to meet, meaning they are within reach. In contrast, other savings products with other providers can be more challenging to open. The Post Office also offers personal loans, credit cards, and foreign exchange services, amongst many others. For that reason, opening a savings account with the Post Office can be a 'one-stop online shop,' which can make managing your money that much easier.
Other types of savings account available in-store
If you need the ability to go into a branch to manage your account or talk to a person on the phone, the Post Office also offers the following savings accounts that can be opened in-store by completing a simple application form.
Instant Saver/Instant Access
The Instant Saver account at the Post Office is very similar to its Online Saver. While you can also access this like an online account, it is also possible to manage this account in branches, by phone or post, and at ATMs with a debit or ATM card. You can open up an account with just £100 and can make other deposits into it as often as you like. The same can be said of taking out money as the product offers unlimited withdrawals. It offers a 0.25% variable interest rate for the first 12 months. After 12 months, that reduces to 0.01%.
If you want a fixed rate of interest as well as the ability to manage your account via a branch or over the phone, the Post Office’s range of bonds may be an option. You can purchase a bond with anything from £500 to £1million. You will earn the following, depending on how long you lock your money away for:
- 1 year at 0.35% gross/AER fixed,
- 2 years at 0.40% gross/AER fixed,
- 3 years at 0.45% gross/AER fixed
Interest is calculated daily and paid at a fixed rate annually. In practice, that means for the 1-year bond, the interest is paid on maturity. For the 2 or 3-year bond, interest is paid on the anniversary of opening the account. No additional deposits can be made after you have opened your account.
Fixed-Rate Cash ISA
The Post Office’s Fixed Rate Cash ISA is a bit like a bond, but with the added incentive that its interest is tax-free. Currently, the Post Office’s Fixed Rate Cash ISA pays 0.30% tax-free/ AER fixed for a one year account, and 0.35% tax-free / AER fixed for 2 years. After those times, the rate will revert to 0.01% tax-free /AER variable. You can invest £500 from the start, but you will have no access to your savings until maturity. No further deposits or transfers are allowed into this account once you have opened it.
Post Office savings account options
There is no beating around the bush. The savings account interest rates offered by the Post Office are meagre. However, so are the rest of the interest rates on savings accounts offered by every other financial institution and high street bank in the UK at the moment. But, just because the interest rates are low does not mean they are totally redundant. If you want a low-risk investment to ensure that you preserve your capital in the run-up to retirement, then these could be a good option for you. That all depends on your circumstances, including what you have saved, what you can afford to lose, and how soon you're retiring.
You must consider these factors before opening up any savings account or applying for any financial product - regardless of the provider. When you are approaching retirement, making the most of your money is crucial, given that you will no longer be earning a salary. In addition, your tolerance to risk is usually lower than someone in employment. However, that is by no means a reason to only make low-risk investments. Consulting with a financial advisor can be beneficial to ensure you're on the right path for your needs. While they will be an added cost to your retirement planning, they can ensure you're managing your money as efficiently as possible.