This episode of the Your Recipe for Financial Success podcast was published on 10th September 2020. You can listen again by heading to our Episodes page, or on your favourite podcast player.

In this episode, Emma, Julie and Becky are sieving through all you need to know about banks and building societies. It’s an essential recipe for anyone looking to get a grip on their personal finance.

Episode Highlights

Banks are owned by shareholders.
Any profit the bank makes is shared between the shareholders in dividends.

A Building Society is owned by its members.
Those with a savings account or mortgage (members) own a small part of the building society, so should benefit from the profit.

Are there any risks with bank accounts and building societies?

  • Interest rates don’t keep up with inflation.
  • Risk of default. This is the risk the bank will run out of money and wont be able to pay you the savings interest rates they promised. The FSFC protects you and your money against this, up to the amount of £85,000.

What should you use a bank account for?

  • Current accounts are ideal for holding your income. Use them for your everyday outgoings, such as the weekly shop or buying the school uniform.
  • Savings accounts should be used for short-term savings, to be used over the next few years. This could be money for a summer holiday, Christmas presents or some new windows.
  • Have an emergency fund to cover unexpected costs. Try and set aside 3 months worth of wages to be used only for an emergency. This could be used if you need a new boiler or find yourself out of work.

How to find the best bank or building society account

There are so many accounts on offer, and they change all the time. To find the best account to suit your need ask yourself a few questions:
1. Are you planning on using it for spending or saving?
2. Will you need instant access to your money?

Then, use a comparison site like Moneyfacts.co.uk or MoneySuperMarket to find the best option for you. Always make sure the provider of the account you choose is regulated by the FCA.

So, hopefully you have filled up on everything you need to know about bank accounts! If this has left you inspired to learn another recipe, check out our other podcasts on our episodes page.

Don’t forget about our Facebook page too where you can ask questions and join in discussions about all of our topics. We look forward to chatting all things personal finance with you!

 

Rediscover the conversation

Becky Campion
So today we’re going to be sieving through all you need to know about banks and building societies. So, Emma, do you want to get us started by telling us what the difference is between a bank and a building society?

 

Emma Knights
Of course. So, a Bank is owned by shareholders. What that means is that any profit the bank makes is shared out between those shareholders in what we call dividends.

A Building Society is owned by its members so that would be anybody that holds a savings account or a mortgage with them. They essentially own a little bit of the building society and they’re the ones that will benefit from the profit. What that should mean is higher interest rates on savings and lower interest rates on mortgages, and hopefully improved customer service as well.

 

Julie Hunt 
Oh, so Emma, is it safe for me to have all my money in a bank or building society rather than just investing it?

 

Emma Knights
There’s two ways of looking at this, with a bank or building society, there’s going to be a little bit more certainty about a few things.

There won’t be the volatility. So, you are going to know exactly what you’re going to be getting. You’ll know exactly what the interest rate is when you make your deposit into that account and what’s going to happen with your interest is it’s going to compound. This means that over the years of your money being in the savings account, you’ll earn more money from the interest.

As an example, if you had an interest rate of 1%, and you had £1000 in your savings account which was in there for a full year, you would get £10 in interest by the end of that year. If you left your £1000, and the £10 in for another full year, you’d be getting 1% interest on your £1010. So at the end of that year, you’d get £10 and ten pence interest.

 

Becky Campion
Excellent. Thanks Emma. So, moving on then, you’ve already said that there’s no volatility in a bank or building society account, what risks are there? Would you say that there’s inflation?

 

Emma Knights
Definitely. So inflation, if you’re not sure what it is exactly, is a general increase in prices and the loss in buying power. Thinking about buying some butter to bake your cake. In 1995, it would have cost you 78p for 250 grams of butter, a little bit different now isn’t it?

 

Becky Campion
You’ve done your research here Emma.

 

Emma Knights 
Yes, I have. So if you were to go and buy 250 grams of butter today it would cost you around £1.49. That’s an increase of 91% over 25 years, which would make an average increase of 3.64% each year.

Do either of you have a bank account that with an interest rate of over 3.6%?

 

Julie Hunt
If you know I’d be very happy to put my money in it!

 

Becky Campion 
Same, not even close.

 

Emma Knights
So, obviously interest rates on savings accounts are incredibly low at the moment. And it’s unlikely that you’re going to find any account that’s going to keep up with the rate of inflation that high.

 

Julie Hunt 
What is the rate of inflation at the moment Emma?

 

Emma Knights 
In the UK at the moment the rate of inflation is 0.5%, but the aim is for it to be 2%. We’ve still got a little way to go to reach that 2%, but that’s what the aim is for it to be.

 

Julie Hunt 
Excellent. What are the types of risk with banks and building society accounts?

 

Emma Knights 
So, one of the other risks that probably jumped into mind for a lot of people is the risk of default. This was the problem in 2008 with the financial crisis.

In really simple terms, it’s the risk that the bank is going to run out of money. That they’re going to close down and not be able to pay the savings interest rates that they promised, or necessarily give back the money that you’ve originally deposited.

Don’t worry. There is something in place to protect you. There is a thing called the Financial Services Compensation Scheme, also known as the FSCS.

What this means is, each person is protected for up to £85,000 per financial institution. So if something happened and they closed down and you didn’t get your money back. The Financial Services Compensation Scheme would refund you up to £85,000.

It’s just important to remember that it’s only £85,000 per person, per group. So if you had an account with NatWest and RBS, that £85,000 would cover both of those but only for the one amount.

 

Becky Campion
Excellent, so I’m sure most people listening have some sort of bank account already in place. Emma, what should you usually use a bank account for?

 

Emma Knights 
So there’s a few different reasons that you might have a bank account. The obvious is probably for your income and outgoings that you use on a daily basis to buy your shopping, normal things.

You then ideally have a savings account for things that you’ve got planned in the short term, over the next few years so. Maybe it’s holidays, birthdays, Christmas, all the nice things that you want to do in the short term.

Also make sure you’ve got an emergency fund.

 

Julie Hunt 
Okay, what’s an emergency fund for?

 

Emma Knights 
An emergency fund is going to be for something completely unexpected, so it could be your boiler going wrong, or it might be that you lose your job and you need the money to replace your income while you haven’t got any money.

 

Julie Hunt 
So, did Becky use her emergency funds for her new hoover the other week?

 

Emma Knights 
She may have done.

 

Becky Campion 
I didn’t actually, I had some savings in my current account but I hadn’t transferred over to my savings account. So, I dipped into my savings for it.

 

Emma Knights 
And that’s perfect use for it because that’s something that you needed in the short term so you use those savings for that.

 

Becky Campion 
Exactly.

 

Emma Knights 
Your emergency fund is just for those things that you never expect to happen. But you need that money just in case.

 

Becky Campion
How much would you expect me to have in my emergency fund?

 

Emma Knights 
In an absolutely ideal world, you would have a minimum of three months of your usual monthly income. It’s just to give yourself enough breathing space. If you didn’t have an income, you’d have that money.

 

Julie Hunt 
Okay, I need to go home and calculate that then! What’s the best bank account to have then?

 

Emma Knights
There are so many different accounts on offer, and they’re forever changing so it’s very very very rare for one account to always be the best one on offer.

It really depends what you’re looking for from an account. So, are you looking for direct debits and a debit card so you can use it as your day to day spending account? Or you may be using it for your savings for a rainy day, or for a new hoover, or for now.

Do you want instant access to it so you can get that new hoover absolutely whenever you want it? Or maybe you don’t need it immediately and you might consider something like a notice account. This is where you have to give, say, 30 days notice or 60 days notice before you can get your money out.

So, it’s really difficult to say, what is the best account right here right now, but a really good thing to use is something like a comparison site. So Moneyfacts.co.uk is one of them. There’s MoneySuperMarket, there are so many different ones where you can go on and choose the filters of what you’re looking for from an account, and it’ll show you the ones that are currently available on the market.

 

Becky Campion
Excellent. And not to bore you all too much, but on the interest that I earn on my in my bank account, do I have to pay tax on it? How does that work?

 

Emma Knights
Unfortunately, yes you do have to pay tax on the interest you earn. However, as a basic rate taxpayer, you have something called a personal savings allowance, where you would get £1000 of interest that you can earn before you pay any tax. As a higher rate taxpayer, you get £500.

So, if you had £10,000 in a savings account, paying 0.55% in interest, you’d earn £50 in interest which means you wouldn’t pay any tax if you’re a basic or a higher rate taxpayer. This is because you’re going to be below the threshold for the personal savings allowance.

 

Julie Hunt 
It looks like I’m going to have to have a lot of money in a savings account to have to pay any tax on it then!

 

Emma Knights
So, I’ve actually done a little calculation for you here. You would need to have over £200,000 in the account, earning 0.5% interest before you pay any tax as a basic rate taxpayer.

 

Becky Campion 
Got some saving to do then!

 

Julie Hunt 
Definitely.

 

Becky Campion 
All I would say is, if you’ve got that much in the account, maybe it shouldn’t all be in there? Maybe we should be looking at other options for it, but that would be a conversation for another day.

 

Julie Hunt
If I was looking for a bank account today, what sort of things do I need to look out for?

 

Emma Knights 
One of the things you need to be looking for is that the account is regulated by the FCA. That will mean you’ve then got your cover from the Financial Services Compensation Scheme in case anything goes wrong.

You obviously also want to be looking at the interest rate, any notice period that you may have to give to access your money, whether it has online access if that’s important to you, or it may even be important that you have a local branch.

So always have a look at those things first, there’s lots and lots of different providers of bank accounts. Some of the names of those providers you’ve never even heard of but it doesn’t mean to say there’s anything wrong with them. As long as they’re regulated by the FCA and you can consider all of those things first then they’re just as good option as the main high street banks.

 

Becky Campion
Thanks for that, that’s been really helpful!