New to saving... advice required.

etones

Hi all, i'm new to investment and am looking for some help to guide me
through a few tangles, all advice is really appreciated.

I have just finished uni and HSBC are allowing me to have an interest free
overdraft of £1500 for 2 years (only £1000 in the 2nd year), an offer i thought
I shouldnt miss out on seeing as though I also have a job. As I am with HSBC i
was looking at there savings accounts and wonder how wrong my calculations are
hopefully any advice you have on how to invest some money going forward.

Firstly, HSBC offer a savings account with an 8% interest rate (gross AER -
exactly what does this mean?). Assuming I put in £250 each month for 12
months, i calculate that I wound end up with somewhere in the region of
£5753.36 after 12 months, or profit of approx £2753. Is this correct? Surely
it can't be. What mistake have I made. Link
(http://hsbc.co.uk/1/2/personal/savings-investments/savings/regular-saver)

Secondly, HSBC offer on online saver account with 4.65% gross, 4.75% AER
variable. If I put the entire £1500 into that account, over 12 months I
accrue £2588, a profit of £1088. Again, is this correct? Link
(http://hsbc.co.uk/1/2/personal/savings-investments/savings/online-saver).

I understand tax has to also be paid on these earnings, could someone
clarify what this would be (im in the middle tax bracket)? Also, are there better alternatives and offers
out there? Im new to all this and such advice would really be appreciated.
finally, they state the interest rates are variable, how likely are they to
fall into something terrible and un-worthwhile?

I appreciate the time taken to read this, its a long post! But all advice
would really be appreciated.

Many thanks,
Taz

Hereward

You are correct that you have made a mistake in calculating your interest payments. The online saver account would give you £71.25 before tax: assuming you will pay tax at the standard rate this would reduce to £57 (£1500 * 0.0475 [4.75%] * 0.8).

The regular saving account is a different beast altogether. As you are new to saving I suggest that you avoid these types of account for now as you need to make regular payments into the account. In addition only the first payment receives the full headline rate (8%), all other payments will receive a reducing portion of this.

Before you commit yourself, you need to check out other saving account providers.

etones

Hereward wrote:

You are correct that you have made a mistake in calculating your interest payments. The online saver account would give you £71.25 before tax: assuming you will pay tax at the standard rate this would reduce to £57 (£1500 * 0.0475 [4.75%] * 0.8).

Thank you for your reply, however now I am confused.

I rang HSBC and they told me the interest was applied monthly. So if I put in £1000, I would get £47.50 interest in the first month. Then compound interests in the subsequent months. is interest only applied once per year?

Thanks for your reply.
Taz

etones

Hereward wrote:

The regular saving account is a different beast altogether. As you are new to saving I suggest that you avoid these types of account for now as you need to make regular payments into the account. In addition only the first payment receives the full headline rate (8%), all other payments will receive a reducing portion of this.QUOTE]

Furthermore, according to this "Competitive interest rate of 8% gross/AER variable on the first £250 saved each calendar month for the first 12 months. On additional savings between £250 – £1,000 per month for the first 12 months and also all savings after the first 12 months, earn interest of 4.25% gross/AER variable.", it is the first £250 each month that gets the 8%? Hence I can get in £3000 each year at 8%, something I will be able to do.

Please advise. Thanks.
Taz

jem16

etones wrote:

Thank you for your reply, however now I am confused.

I rang HSBC and they told me the interest was applied monthly. So if I put in £1000, I would get £47.50 interest in the first month. Then compound interests in the subsequent months. is interest only applied once per year?

Thanks for your reply.
Taz

The 4.75% is an annual rate which as Hereward worked out for you would mean £57 over the whole year. If you took the interest monthly, you would get approx one twelfth of that each month - usually less so that the compound interest works out to the yearly rate.

AER stands for Anuual Equivalent Rate

dancingfairy

ISA's are probably your best bet- well one to be precise. mini cash ISA's allow you to save up to £3000 tax free per year in cash. See where to start with saving and read Martin's guide to ISA's.

Regular savings accounts mean you have to put in money each month and also you will only earn 8% on money that's in there for a year (ie the first month) - the rest will only earn a percentage depending on how long it's in there - ie the second month's payment will only earn 11/12ths of 8% etc. With compunding interest as well - it all gets rather complicated so I would start off with a mini cash ISA and then go for a regular savings account.

You can't be sure the bank will not cut interest rates but the best thing to do is to check every 6 months or so your account is still competitive. None of the accounts I've had have ever drastically cut their interest all of a sudden it seems to be more gradual but it's always worth keeping an eye on it.

As Martin has said - loyalty doesn't pay - it only pays the bank. The best way is to shop arround for accounts as a bank that has a good current account doesn't always have a good savings account etc.

SeanW

I put my fee and interest free £1 500 overdraft into a First Direct ISA which at the time earned about 5.15% or something. Anyway, at the end of the year when I had to pay £500 of it back (on my Graduate account, it decreases £500 each year) HSBC (via First Direct) had kindly given to me, for free, around £75 (and the £50 they gave me to open it).:T

BTW, I plan to pay back the overdraft from money not in that ISA, i.e. other savings, as I dont want to take away it's tax free status.

As pointed out by others, 4.65% gross / 12 will give you the monthly rate of 0.3875%, which when compounding all the interest, will give you a rate of (1.003875^12) 4.75% (i.e. the Annual Equivalent Rate).

It will be slightly less, because some of that "compounded" interest is in the taxman's pocket.

HSBC have awful rates, to get a half decent (and it's not even that) ISA rate you have to be a premier banker.

etones

Well, this saving lark seems much harder than i anticipated! lol.

Guys (and ladies) you have been top notch, thanks for the clear up and advice. Please keep it flowing.

Taz

Hereward

I agree that you would be better off putting your money in an ISA, as it will earn interset tax free.This will be especially affective if you keep the money in the ISA and pay the overdraft off from another source, your income say.

etones

What happens to an ISA's after the year ends? Does interest continue to build year on year?

Thanks
Taz

dunstonh

ISAs will continue until the Govt remove the tax free status.

The limit is based on the contribution in that tax year. After that, it can grow to whatever its potential allows. The minute the new tax year begins, you get a brand new £7000 allowance.