The worst holiday you could ever take

Taking a break from your savings might seem a sensible move with money tight, but it could end up costing you a fortune.

Everybody loves a holiday, don’t they? Well, not quite everybody. Your savings don’t. In fact, they dread them. So consider their feelings next time you thinking about taking a break from any regular contributions you make.

Costly holiday

With money tight, taking a break from your savings or contributing to your pension is certainly tempting right now. But resist the urge if you can, because even a short break can cost you dear in the longer run.

One in three people who have taken a savings holiday regret doing so because it’s so difficult to start putting money away again, according to research from the Post Office.

The average regular saver pays in £131 a month. This means a four-month break can knock £524 off your savings. It will actually cost more than that, because you will also lose years of compound interest on that money.

That could even be the most expensive holiday you ever take.

Unlucky break

Taking a savings holiday is like taking a regular holiday. It seems like a good idea at the time, but invariably turns out to be more expensive than you think. And it takes time to readjust afterwards.

If you have taken a break, climb back on the savings wagon as soon as you can.

Keeping it regular

Setting up a regular savings plan is one of the best ways of putting money aside for the future. Once you have arranged the direct debit or standing order, the money exits your current account every month and you don’t have to do anything else.

After a time, you probably won’t even notice it leave. It simply scoots off to the more rewarding destination of a savings account, without any further ado.

But you must make sure your money finds a happy and lucrative home. That isn’t easy, as you have to pick your way through a forest of small print to get there.

What’s in a rate?

You might be tempted by Norwich & Peterborough Building Society’s Regular Saver, which pays an eye-catching fixed rate of 4% for 12 months. But this includes a “conditional bonus” of 1.5%, which you only get if you save every single month for a year, and make no more than one withdrawal. Without that, you get just 2.5%.

Unusually for a savings account, the bonus survives beyond year one. But the underlying rate slumps instead, cutting your total return to just 1.85%. If you fail to earn that conditional bonus, you get a meagre 0.35%.

The ideal regular savings account is one you can set up and forget about, confident that you will get a good rate, year after year. Sadly, that account doesn’t seem to exist.

All that glistens...

Buckinghamshire Building Society’s Chiltern Gold Builder Issue 2 pays a variable 3.5% without any introductory bonus. You can invest between £25 and £250 a month, but the maximum balance is a lowly £3,000. After that, you need to look elsewhere.

Again, you also have to commit to making a regular payment every month. If you miss just one monthly payment, your interest falls to just 0.1% for the entire year.

Now that’s an expensive holiday.

Some banks restrict their best savings accounts to current account customers. If you have a current account with First Direct, HSBC and Santander, check out their savings rates.

I should think Notts

If you’re a taxpayer, don’t neglect your tax-free ISA allowance. You can save up to £5,340 in the current tax year and take all the interest free of income tax. If you’re setting up a regular savings plan, that works out as £445 a month.

The Nottingham Building Society Starter ISA pays a generous 5% on up to £445 a month. You can also vary your monthly repayments, and even top up your account to £5,340 in March, to make full use of your Isa allowance.

It doesn’t even trip you up with an introductory bonus. The big drawback is that the account stops at the end of the tax year in March 2012, when you are switched into an instant access account at a lower rate.

Skipton Building Society’s Regular Saver ISA pays a fixed 3.25% on a maximum £445 a month. Again, after one year your money automatically transfers into an easy access cash ISA with a lower rate of interest.

That’s why it pays to set up a cash ISA right at the start of the tax year.

Friendly bonds, unfriendly charges

There’s another tax-free way to save small amounts regularly, the friendly society savings plan. Sometimes known as baby bonds, these are popular with parents and grandparents.

Mutual societies such as Scottish Friendly and Family Investments allow you to save a maximum of £25 a month for a fixed period, typically 10 years, and take all your returns free of tax.

Sadly, these bonds are inflexible, locking you into a long-term contract with penalties for early withdrawal, and the low contribution levels mean a high proportion of your money is eaten up in charges. I'd suggest you use your ISA allowance first.

Holiday from hell

The big advantages of regular savings is that it installs discipline. Even saving a small monthly amount is worthwhile, as it will add up over time. Just don’t be tripped up by the small print. And say no to those holidays!

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