Posted in:

Long Term Savings Account: Plans and Saving Rates

Savings form a crucial part of anyone’s financial future and financial security. People with planned short-term and long-term savings are better prepared to handle financial emergencies and other financial requirements than those without. While short-term financial goals like vacations, gifts, and insurance, can be taken care of using short-term savings accounts, longer-term financial goals can be handled better using long-term savings accounts.

🤓 Who needs a Long-Term Savings Account?Individuals that want to grow the money they don’t plan to spend soon
🛑 What is the maximum I can have in savings?There is no limit to a savings account, but ISAs have a deposit limit
💂 Where is the safest place to put your money?A savings account protected by FSCS
🤏🏻 How much should I have in savings?As much as you like but only £85,000 is covered by FSCS

What is a long-term savings account, and why do you need one?

Long-term savings accounts are the type of savings accounts used to save money for long-term financial goals. The money saved in such savings accounts is usually used for buying a home, children’s education, retirement, or similar one-time, long-term expenses. It helps people make the most of their money by saving it for a more extended period at a better rate of interest, supplemented by the power of compounding.

How does a long-term savings account work?

Long-term savings accounts have unique features and characteristics that can make them a better option than traditional savings accounts. The most striking feature of long-term savings accounts is the power of compounding interest. The interest earned from this savings accounts is, in turn, reinvested and added to the base for calculating interest for the later years.

So, in theory, the base amount for calculating the interest keeps growing with time, and the money multiplies faster, generating higher returns over time. The magic of compounding interest works exceptionally well if you start saving early in long-term savings accounts. The longer you let the money grow in these accounts, the more the interest compounds.

Additionally, the time horizon of long-term savings accounts ensures that savers do not get hassled by short-term price fluctuations and market volatility. The focus shifts from daily movements to the basic fundamentals of investment and can result in meaningful wealth creation over a long period. The associated risk also gets substantially minimised due to the longer time horizon as the short-term price fluctuations get balanced out by the end of the investing period.

Benefits of long-term savings account

Long-term savings accounts have some benefits. They include:

High interest rates: Long-term savings accounts offer higher interest rates than regular or short-term savings accounts. Some offer fixed rates of interest, while others may offer variable rates depending on the type of long-term savings account.

Wealth Building: The longer you keep your money in a savings account, the more money you can earn. Compound interests also help your interests earn more money.

Setting Goals: These savings accounts are used to set long-term financial goals, such as saving for a mortgage or retirement.

Tax Benefits: Some long-term savings accounts offer some tax relief, such as tax-free withdrawals and tax-deferred growth.

Financial Security: Financial security comes from knowing that you have a set amount of money that has been set aside for a long-term savings plan. So, emergencies and unforeseen expenses may not be a problem.

In all, choose the right savings account that fits your financial goal as well as help you build health and provide a sense of security.

Long vs short term savings account

There are some key differences between a long-term and a short-term savings account. They include:

Differences

Long-term Savings Account

Short-term Savings Account

Account MinimumMay require a higher amount to fund the accountThe minimum amount used to open an account is minimal
Interest ratesHas better interest rates than short-term savings accounts due to a longer savings periodHas lower interest rates due to short-term periods of saving
Access of fundsHave more restrictions and may impose a penalty for withdrawals before a specific time frame or maturity date.May allow frequent withdrawals from an account
PenaltiesAre usually imposed on early withdrawalsTypically do not have penalties
FeesHave fees such as annual management fees and early withdrawal feesHave fewer to no fees associated with the account
Financial GoalsAre used to achieve long-term financial goals that require years of savingare used to set short-term financial goals

Regardless of the factors stated above, before picking a long or short-term savings account, consider your financial goal, personal circumstances and the amount you have to save.

Types of long-term savings accounts

There are many different types of long-term savings accounts that offer a variety of advantages. While some ensure high returns and yield, others are better at providing tax benefits. You can choose the long-term savings account that works the best for you based on the fees you pay, the interest you earn, tax benefits, and withdrawal rules.

High-yield savings accounts

High-yield savings accounts are long-term savings accounts that pay higher than normal interest rates. They are usually FDIC-insured and pay out higher interest as the withdrawal from this type of account is limited and requires higher initial deposits. Thus, the bank or credit union compensates for the higher deposit and limited withdrawal by providing a higher annual percentage yield than standard savings accounts.

Certificates of deposit

Certificates of deposits (CDs) are another type of FDIC-insured long-term savings account offered by banks and credit unions. They also pay a higher interest rate; however, they differ from high-yield savings accounts in being timed accounts. The money saved in CDs is locked in for a minimum period, and withdrawals before maturity attract a penalty. The terms of certificates of deposits range between 30 days and 10 years, with a higher interest rate for longer time periods.

Education savings accounts

Many financial institutions offer specific long-term savings accounts for the purpose of children’s education. These savings accounts allow tax-free contributions for years, with tax-free withdrawals at the time when higher education commences. The interest rate is high, and withdrawal is restricted in most education savings accounts.

Individual and employer-sponsored retirement accounts

Retirement accounts are an excellent example of long-term savings accounts. They help you save for retirement and let you use the power of compounding interest to grow your money for a comfortable life post-retirement. The contributions made towards retirement accounts attract tax benefits, and the money is invested in mutual funds and ETFs to grow. Some long-term retirement savings accounts also have the potential to get matching employer contributions. Thus, you may also get free money in addition to tax savings and growth.

Importance of long-term savings accounts

Long-term savings accounts give your savings a long-term perspective and help you prepare for financial needs in the future. The savings in long-term accounts come in handy for one-time lump-sum money needs, like buying a home or children’s education, and also form an integral part of funding retirement.

As we’ve touched on, the most significant advantage of long-term savings accounts is the power of compounding. They also encourage savers to stay invested during the ups and downs of the market. Investors can increase their holding power, sail through market fluctuations, and grow their money in the long-term despite short-term downward movements in market prices. The value of investments or savings in long-term savings accounts may go down temporarily; however, the magic of compounding interest and long-term horizon facilitate a net positive performance by the time of withdrawal.

Best long-term savings accounts

Thus, long-term savings accounts play a critical role in creating financial security and keeping one prepared for future financial needs. They offer higher rates of interest than traditional savings accounts due to the longer lock-in period and help the investors tide over short-term market changes.

However, the various long-term savings accounts offered by different banks and credit unions differ in their interest rates, risks, returns, and diversification. Therefore, choosing the long-term savings account that best suits your needs is essential. The following factors must be considered when choosing the best long-term savings account for you.

Interest rate: The primary reason for investing in long-term savings accounts is higher than normal returns and interest rates. So, you should compare the best long-term savings rates different financial institutions offer to find your best option. Most of the time, the interest rates are higher for a longer lock-in period; therefore, you should choose the most optimum combination of interest rate and withdrawal restrictions based on your time horizon and financial goals. It is also critical to ensure that the interest rates offered on long-term savings accounts are high enough to beat inflation in the long term.

Diversification: The risks and returns associated with long-term savings accounts are also correlated with the diversification of the investment portfolio. So, you must choose a long-term savings account with diversified investments to reduce the risks and increase the returns.

If managed well, long-term savings accounts create a disciplined portfolio to meet long-term financial needs. They make the best use of compounding interest and grow savings over the long run in a relatively steady fashion. Additionally, they inculcate the habit of investing, grow faster than traditional savings accounts, and help tide over the panic and overreaction associated with short-term price fluctuations.

Using an ISA as a long-term savings account

Some people use ISAs as long-term savings accounts depending on their investment strategy. Some people use ISAs as an additional retirement account, and the money saved in an ISA is used to supplement their total pension pot size.

Remember that there is a stack difference between ISAs vs Savings Accounts. Most use ISAs for their tax benefits, which they can not get from a general investment or regular savings account. There are several types of ISAs, and each has different rules. For example, some ISAs have restrictions on access to funds, withdrawing money from your ISA becomes almost impossible with a Lifetime ISA if you are not using the funds to purchase a first home.

A stocks and shares ISA is one of the best ISAs for long-term savings and investing due to its long-term ISA rates. Cash ISAs are usually used for short-term savings and investments. Lifetime ISA has an 18 and 39 age restriction and a maximum deposit limit of £4,000 per tax year, while Innovative Finance ISA has a higher risk due to its peer-to-peer lending nature.

Above all, always choose a savings account that is regulated by the Financial Services Compensation Scheme (FSCS). FSCCS ensure money and investments are protected up to £85,000 per person, per bank or authorised firm.

Liquidity+ Investing

Moneyfarm has created Liquidity+, a novel investment model delivering a gross annualised yield currently topping 5.2%. It features a modest risk profile complemented by transparent, competitive rates. It’s not just a low-risk asset filled with bonds, CDs, and commercial paper; it’s a shrewd approach for achieving short-term financial milestones.

By tapping into the surge in yields from recent rate adjustments, it offers a bespoke market entry rhythm. Investing in a fund with an annual yield surpassing 5.2% curtails risk, bolstering the importance of liquidity via a diligently devised solution. While Liquidity+ is adept for short-term financial goals, it’s not intended as a long-term savings account.

Created with a 2-year or shorter span in view, Liquidity+ ensures adaptability, granting the freedom to transfer funds to other Moneyfarm portfolios or exit funds whenever desired. Our Asset Allocation crew cherry-picks the prime money market funds for Liquidity+ while vigilantly monitoring performance and risk, instituting required changes. Expert advice is accessible to determine Liquidity+’s contribution to a portfolio, ensuring it resonates with financial ambitions and risk comfort levels.

Steady performance reviews guarantee that every investment aim is proficiently met. With a transparent 0.3% management fee (VAT inclusive) + 0.1% for underlying assets, Liquidity+ not only showcases transparent and competitive pricing but also assures meticulous investment management.

FAQ

What type of savings account is best for the long term?

Choosing the best long-term savings options will depend on factors such as your financial goal, interest rates, ​​monthly account fees, withdrawal penalties and limits, etc. SIPPs and ISAs are suitable for retirement savings. Other types of savings account best suited for the long term include high-yield savings accounts and certificates of deposit (CD).

Can I withdraw money from my savings account?

It depends on the type of savings account. Some of the best savings accounts for easy withdrawals include easy access savings accounts, notice savings accounts and cash ISAs. Savings accounts that provide free withdrawals usually offer lower interest rates. Long-term fixed savings accounts and regular savings accounts can have your money locked up for a period of time.

Do I pay tax on a long-term savings account?

Interest earned from a long-term savings account is subject to income tax depending on the taxpayers’ income tax band. Personal savings allowance lets you earn £500 to £1,000 in savings income tax-free, depending on your income tax band. On the other hand, ISAs and SIPPs are tax-free.

.

*Capital at risk. Tax treatment depends on your individual circumstances and may be subject to change in the future.