Putting any income or savings you have in a suitable place is always a smart financial move. However, pensioners need to find savings accounts that answer their own specific needs. Given that you will have a shorter investment time frame as a pensioner and no longer be earning an income, you are far more sensitive to any losses incurred through bad investment decisions.
In this article, we look at regular savings accounts as a possibility for pensioners. To do so, we define what a regular savings account is and at their pros and cons.
Importantly, it is essential to appreciate that banks and building societies use different titles to name this type of product. For example, Barclays call their regular savings account ‘Everyday Saver’ and Natwest call theirs ‘Instant Saver’. Additionally, depending on the provider, these accounts can also sometimes look reasonably similar to instant access accounts. However, they have differentiating features that do not make them suitable for instant access purposes, which we will explore below.
What Exactly is a Regular Savings Account?
A regular savings account is just that - an account you can open and add to regularly each month to earn interest. Historically, the pull of these accounts is that they pay a higher interest rate than other savings accounts like current accounts or easy access savers. However, with those higher interest rates come a much stricter set of conditions that you need to meet to achieve the advertised return. The most obvious being that you must pay into such an account regularly.
Pros of a Regular Savings Accounts For Pensioners
Here are the key benefits of saving your money into a regular savings account if you are a pensioner. You need to weigh up these benefits against your circumstances to conclude if this type of account is suitable for you. This means you need to consider the amount you have to save and how much income you have over a month or year. Finally, you will also need to consider your outgoings too.
This type of account is an excellent financial product for pensioners as they are relatively low risk. You can rely on your savings earning a certain amount with your money growing. This is in comparison to riskier investment vehicles like Stocks and Shares ISAs, which can lose value. When you open such an account, you can guarantee that you will, at the very least, be able to withdraw your original investment amount. You thus protect your capital, which is vital in your retirement.
Competitive Interest Rates
As briefly alluded to above, this product’s main distinguishing feature is the headline interest rate that you can potentially earn. They tend to be far higher than other savings accounts that are offered by banks or building societies. They can amount to a percentage or two higher than products like easy access savings accounts and even some fixed-term bonds.
Another great benefit of this product is that you can open more than one account across different banks. This means that you are not limited to a certain amount as you would be with a Cash ISA or Stocks and Shares ISA, which is limited to £20,000 in the tax year 20/21. The result is that you can open as many as you want or need for the amount that you have saved to take advantage of the higher interest rates - if that investment strategy works for you.
Getting into the habit of regularly saving a certain amount is good practice and one of the happy side effects of these products. It teaches those who have them not to spend all their income and instead save a little each month, which is crucial for a healthy financial attitude. It encourages people not to lead a hand to mouth lifestyle, which can sometimes be difficult for pensioners given that you may have limited income.
Cons of a Regular Savings Accounts For Pensioners
While there are several fantastic benefits to a regular savings account, you must consider the disadvantages - particularly with a pensioner risk profile in mind.
Interest Earned Is Less Than Headline Amount
The headline amount of interest advertised on these accounts is a massive draw. However, it is imperative to remember that you won’t earn that on an entire lump sum. Instead, you only earn on what you have saved. Additionally, there is a limit to how much you can pay in each month. This limits the total amount of interest you can earn in one of these accounts to lower than what you may have expected.
Monthly Deposit Limits
You may not always receive the headline interest amount if you do not save regularly. These accounts are not suitable if you do not intend to save a certain amount each month. If you don’t, you will find that you won’t earn the headline amount of interest that month, or you may find that your account is even closed. Plus, many of these accounts won’t let you make up what you didn’t invest in future months.
Penalties for Withdrawals
This type of product comes with the aforementioned strict conditions. If you need access to the money you are paying in, this type of account may not be for you. You risk losing some of your initial investment amount or forgoing any of the interest you have earned by withdrawing before your investment period is up.
Short Interest Rate Period
Perhaps one of the most frustrating disadvantages to this savings product is that most only offer the initial high interest rate for a year. After that, you will find that the account reverts to a much lower rate that your provider sets. It means that after just a year, it can be prudent to move your money to another investment vehicle to earn more interest elsewhere.
Are Regular Savings Accounts a Suitable Investment for Pensioners?
There are some great benefits to these savings accounts for pensioners - the high amount of interest paid being one of them. They can help make your nest egg grow and help make up any shortfall between your pension and your monthly outgoings. However, before investing in one or many of them, remember that you won’t be earning that interest on the final amount you have saved by the end of the first year. Instead, interest is paid as the regular savings amount goes up slowly over your investment period. Plus, not being able to quickly and easily access your savings, without any penalties, may not be a workable option for you.