In my home country of Ukraine, investment options are somewhat limited. To preserve the value of their savings, people typically convert UAH into more stable foreign currencies, such as the US dollar or the Euro. While savings accounts are available in both the national currency and major world currencies (like the dollar, euro, and pound), interest rates tend to be low and often trailing the inflation rate of the respective currency.
The UK, however, offers a much wider array of investment opportunities.
UK Savings Accounts: Fixed-Term vs Instant Access
First, let's look at standard savings accounts in sterling. Fixed-term savings accounts allow you to lock your money away for a set period—typically 6 months, 9 months, or anywhere from 1 to 5 years—often in exchange for a higher interest rate.
Alternatively, 'instant access' savings accounts allow you to top up and withdraw funds at any time. These usually offer lower interest rates than fixed-term accounts. Think of them as similar to a current account but with interest paid on your balance; the main difference is that you'll usually need to transfer money back to your main spending account to use it.
Interest earned is potentially taxable, depending on your total yearly income. You can check your personal allowance status using the tax calculator on the HMRC website.
My view and experience with Savings Accounts (2022-2025)
Although instant access accounts generally offer lower rates, I use them for my emergency fund because of the easy accessibility. Savings accounts are ideal for medium-term goals (1-2 years), such as buying a house or car, or funding home renovations, you name it. For long-term goals (5+ years), Stocks and Shares or other investment vehicles may provide better returns.
What Is an ISA? Understanding Tax-Free Wrappers in the UK
Individual Savings Accounts (ISAs) are powerful tax-free 'wrappers' that allow you to save and invest up to £20,000 per tax year without paying tax on the returns. The two main types are Cash ISAs and Stocks & Shares ISAs. You can split your £20,000 allowance across different types (including LISAs). For instance, you could deposit £10,000 into a Cash ISA and invest the remaining £10,000 in a Stocks & Shares ISA.
Note: The government aims to encourage more stock market investment, so starting from April 2027, the annual contribution to Cash ISAs will be capped at £12,000 for those under 65.
My view and experience with ISAs (2022-2025)
Personally, I don't think the proposed Cash ISA cap will negatively affect many people. If you aren't planning to retire in the next 5-10 years, you're likely better off building wealth through Stocks & Shares. (Conversely, if you are retiring soon, it's often wise to shift your portfolio from 'adventurous' to 'conservative'). I've wondered who would choose to allocate their full allowance to a Cash ISA. In my opinion, it generally appeals to those who have already diversified their portfolio in other assets and seek tax-free, guaranteed returns from cash reserves.
Lifetime ISA (LISA): Free Money for First-Time Buyers
Lifetime ISAs are designed for first-time buyers or those saving for retirement (funds can be accessed penalty-free at age 60). Anyone aged 18-39 can open one. You can invest a maximum of £4,000 per tax year, and the government will add a 25% bonus to your contributions. For example, if you save £2,000, the government adds £500; if you save the full £4,000, you receive a £1,000 bonus.
Crucially, LISA contributions count towards your overall £20,000 ISA limit. This means if you put £4,000 into a LISA, you have £16,000 remaining for other ISA types.
Caveats:
- The property you purchase must cost £450,000 or less.
- If you withdraw money for any other reason (before age 60), you will face a 25% penalty. Due to the way the math works, this penalty means you will get back less than you originally put in.
- You can continue making contributions until you are 50 years old.
Interestingly, once you used your LISA to buy a home, you can open LISA once again and use it as a harbour for your savings until you are 60 years old. Whether it makes sense to do so is a question for another post about pensions.
My view and experience with LISA (2022-2025)
In my opinion, a LISA is excellent for buying a first home — provided you aren't buying in London where prices often exceed the £450k cap. Otherwise, it can be a useful retirement savings tool due to the government bonus. However, if you are holding funds for that long, a Stocks & Shares LISA is generally preferable to a Cash LISA for potential growth.
Premium Bonds: Tax-Free Savings With a Monthly Prize Draw
Premium Bonds offer a way to park cash (up to £50,000) securely. Instead of earning guaranteed interest, you are entered into a monthly prize draw. Prizes range from £25 up to £1 million, though the odds of winning a major prize are small. The key attraction is that all winnings are completely tax-free.
My view and experience with Premium Bonds (2022-2025)
I believe Premium Bonds make sense if:
- You are a higher-rate taxpayer who has already exhausted other tax-efficient options, such as your ISA allowance and personal savings allowance.
- You need to keep funds in cash—for instance, as an emergency fund or for an upcoming purchase.
The worst-case scenario is that you win nothing, and your savings effectively lose value due to inflation. With average luck and avarage investment £20000, people tend to win smaller sums (e.g., £25–£100). Returns depend on how much you hold, how long you hold it, and, of course, luck. Martin Lewis offers a great Premium Bonds calculator that can help estimate your likely winnings.