From the security of high-interest savings accounts to the potential risks and rewards of investing, we’ve created this guide to help you compare and choose the best option for your financial journey.
What’s the difference between saving and investing?
Saving and investing are related financial activities with different purposes and outcomes. Saving involves putting your money into cash products, such as banks and building societies, usually to save for bigger purchases or an emergency fund. Whereas investing involves putting your money into products, such as stocks and shares, with the goal of making it grow more efficiently.
Saving is generally considered a low-risk option, as you won’t lose money if interest rates rise or fall. But it’s worth noting that even if you have a high-interest savings account, your savings can lose value in real terms should inflation rise.
Investing has the potential for bigger gains, but with this comes a higher risk. If the market works in your favour, your investments will increase in value and you’ll make a profit. But investments can decline due to a variety of factors, such as a rise in interest rates or a recession.
Understanding your risk tolerance
Risk and reward are closely connected in the investment world – the more risk you take on, the greater your chances are of a higher return on your investments.
To determine your risk tolerance, you’ll need to ask yourself how comfortable you feel about your investments losing value. Would you be happy to wait it out in the hope your investments will improve in the long-run? Or would you worry about losing your savings?
If you have a low-risk tolerance, find out why a high-interest savings accounts would suit you.
High-interest savings accounts vs. other investment products
Below, we look at how different savings and investments products compare to a high-interest savings account, focusing on risk, reward, and access.
1. High-interest savings accounts
A high-interest savings account is a product offered by banks and building societies. They often reward you with a more attractive rate of return compared to current, high-street accounts or instant access savings accounts.
Risk
High-interest savings accounts are generally considered lower risk compared to other investment options. Savings accounts also come with Financial Services Compensation Scheme (FSCS) protection. This means if your bank or building society collapses, you're entitled to compensation of up to £85,000 per individual, per financial institution, or up to £170,000 for joint accounts.
However, there are still some risks associated with high-interest savings accounts. Interest rates on savings accounts are subject to change based on market conditions.
The type of account you choose dictates how market conditions can impact your interest rate and savings returns, potentially reducing your overall earnings. If the interest rate on your savings account falls below the inflation rate, the purchasing power of your savings will weaken.
Returns
Returns on savings accounts vary widely and are influenced by factors such as interest rates, economic conditions, and individual bank policies. Some online banks or financial institutions, such as challenger banks, may offer higher rates compared to traditional high street banks, as they have lower operating costs.
You can view and compare the latest rates from our banking partners on our website.
To maximise your returns, it's important to be proactive with your savings. There are several strategies you can use to boost your interest income, from locking your cash away for a longer term, or opening multiple accounts to take advantage of the best rates.
Access
How regularly you can withdraw money from a savings account will depend on the type of account you choose. With an instant access account, you’ll be able to withdraw your money at short notice, or immediately, without facing a penalty. The downside to this, however, is the interest rate you’re offered tends to be lower or subject to change. For fixed-term accounts, you’ll usually be offered a higher interest rate but won’t be able to make any withdrawals until the end of the term.
2. Premium Bonds
Premium Bonds are an investment product offered by National Savings and Investments (NS&I). Instead of earning interest, you’re entered into a monthly prize draw for a chance to win.
Risk
Unlike traditional savings accounts or fixed-term deposits, premium bonds do not offer guaranteed interest or returns. Bondholders rely on the chance of winning prizes through a monthly lottery, so there is no assurance of earning any returns.
Although the original investment in premium bonds is typically returned when cashed in, the value of the money is likely to be eroded over time due to inflation. With this in mind, you may want to evaluate the opportunity cost against other investments that offer more predictable and potentially higher returns.
Returns
Every premium bond has a unique number, and these numbers are entered into a monthly prize draw with the chance to win between £25 and £1 million, tax-free. If your bond number is selected, you win a prize. The prizes vary in size, with some individuals winning significant amounts, while others win smaller or no prizes at all.
As of March 2024, the odds of each £1 Premium Bond winning a prize per month is 21,000 to one, with a prize-fund rate of 4.40%.
Access
You can cash in your Premium Bonds at any time. According to NS&I, it takes up to three banking days for the money to reach your account, unless you have elected to cash in after the next draw.
3. Cash ISAs
Cash ISAs are tax-free savings accounts. This means you pay no tax on the interest you earn.
Risk
With a cash ISA, there’s little risk of financial loss because they’re protected under the FSCS. However, interest rates on cash ISAs can change and the rate you’re offered could go down. They’re influenced by broader economic conditions, monetary policy, and the decisions of the financial institution offering the ISA.
Returns
The returns on a cash ISA come in the form of interest earned on your savings. Some cash ISAs provide a fixed interest rate for a specific period, such as one or two years. With fixed-rate ISAs, you know exactly how much interest you'll earn during the fixed term.
The government sets a limit for how much you can save into ISAs each financial year. The allowance limit for the current tax year is £20,000.
Access
With an instant access (or easy access) cash ISA, you can withdraw your money whenever you like. But if you have a fixed-rate cash ISA, you’ll have to wait until the end of the term to withdraw funds. If you need to withdraw funds before the agreed-upon term, you may have to pay fees or lose some of the interest earned.
4. Pensions
Pensions are a tax-efficient way of saving money during your working life to fund your retirement. There are several different pension schemes available. Some may be managed by your employer, while others can be set up yourself.
Risk
While having a pension plan can provide financial security in retirement, there are some risks associated with it. Market volatility can impact the value of pension investments, potentially leading to losses.
Inflation erodes the purchasing power of money over time. So if your pension pot doesn’t keep pace with inflation, you may find that the real value of your pension income decreases.
Returns
Pension plans are a tax-efficient way to prepare for your retirement. Basic-rate taxpayers get 20% pension tax relief, and higher-rate taxpayers get 40% pension tax relief.
Predicting the exact returns on a pension in the UK can be challenging, as it depends on various factors, such as the type of pension scheme, investment choices, market conditions, and economic factors. Returns are influenced by the performance of the underlying investments within the pension fund.
To get an accurate forecast for your specific circumstances, talk to a Financial Adviser who can provide tailored advice based on the latest market conditions.
Access
With a pension plan, you’re not allowed to withdraw your money before the age of 55. From 2028, this will rise to age 57. With your state pension, you won’t be able to access your funds until you’re 66 years old, which will rise to 67 in 2028.
5. Index funds
An index fund is a type of investment that aims to replicate the performance of a particular stock market index, such as the FTSE 100. The cash you put into the fund is invested in all the companies that make up the particular index, which gives you a more diverse portfolio.
Risk
Like other investment types, index funds come with a level of risk. Index funds follow how the overall stock market or a specific part of it is doing. If the market goes down, your investment in the index fund can also lose value. Even though index funds spread your money across different stocks, they might focus too much on one type of business. If that type of business performs poorly, it can negatively impact your investment.
Returns
Returns on index funds can vary widely based on the specific index being tracked, market conditions, and the performance of the underlying assets. Index funds tend to follow a passive style of investing. This means they aim to maximise returns over a long period of time, rather than buying and selling often.
Index funds typically offer diversification by holding a basket of stocks or other assets. Diversification helps spread risk, which can contribute to more stable and potentially positive returns.
Access
To invest in an index fund, such as the FTSE 100 index fund, you’ll need to open an investment account with a reputable fund supermarket. The price of an index fund is calculated at the end of the day, so can only be bought or sold at the end of the trading session.
How much interest could you be earning?
If a high-interest savings account sounds like the right option for you, use our cash deposit calculator to see how much interest you could be earning on yours savings.
Why choose Flagstone?
As the UK’s leading cash deposit platform, Flagstone lets you both protect your cash, and maximise its possibilities. Here are some of the benefits of opening an account with us:
- Maximise your interest: Grow your cash with exclusive rates from 60 banks and hundreds of savings accounts.
- Protect what’s yours: Split your cash between banks, for maximum FSCS protection on your deposits.
- Escape the paperwork: Access hundreds of rates with a single application, and manage your savings with one password.
- Stay in control: Our platform is open and available 24/7. So you can manage your portfolio any time, from anywhere, at a moment’s notice.
- Secure your data: We protect your sensitive data with industry-leading Transport Layer Security (TLS). So you can take care of your cash, while we take care of your information.
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