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Deposit Investments

‘Deposit investments' normally refers to investment in a bank account or building society account. Each type of deposit investment has its own benefits and drawbacks. Below, we will examine the befits and drawbacks of each common type of deposit investment.

Bank Current Accounts

Having a bank account is for most adults a part of life in the UK, Many bank current accounts pay a very small rate of interest and as such are not really classed as investment accounts. Usually withdrawals can be made from the account without penalty or notice .Many banks have free banking but in some instances you may have to pay for their services.
Comparatively speaking, interest rates offered on current accounts are usually much lower than those offered on deposit accounts. Their purpose, and best use, is usually for day-to-day living expenses and disposable cash, rather than long-term cash investment.

Bank Deposit Accounts - Bank Deposit Investments

Bank Deposit Accounts (sometimes called ‘savings accounts') are much more appropriate as investments. These are accounts, operated by banks, which pay interest. Different types of account have different conditions but generally the higher the rate of interest the longer the notice of withdrawal or the smaller or less well-known the bank. Often, small amounts can be withdrawn without notice. The capital invested will not go down but the interest will usually be variable at the discretion of the hank.

Tax Implications of Bank Deposit Investments

There is no capital gains tax (CGT) but the interest is subject to income tax. The banks will deduct 20% from the payment and credit the balance to the account holder. Higher rate taxpayers will have to pay extra tax on the gross interest on their annual assessment and non-taxpayers can reclaim from Her Majesty's Revenue and Customs (HMRC) the tax deducted. Alternatively, non-taxpayers can be paid without deduction of tax on completion of the appropriate certificate (R85). Basic rate taxpayers have no further liability.

Bank Deposit Accounts as Cash Investments

A deposit account with a major UK bank is a safe home for money as the capital cannot go down, some interest is paid and there is the security provided by the Financial Services Compensation Scheme. However, the interest rate is not guaranteed and can be reduced in the future without notice. In addition, although the nominal value of the capital does not go down, its real value will be reduced by inflation. A deposit account is therefore not the best medium or long-term 'serious' investment — it is better looked at as a home for short-term cash.

Building Society Accounts

Building societies offer interest-bearing accounts with a huge variety of terms. In many cases the interest is variable at the discretion of the building society. Often, higher rates are offered for higher deposits.

Getting the Best Building Society Investment Rates

Instant access is usually a feature of basic accounts, but the best building society interest rate accounts require a period of notice before money can be withdrawn. Generally, the higher the interest rate the longer the period of notice. Some accounts might offer a guaranteed rate for a defined period but on no account can the capital go down.

How do Building Society Investments Differ?

However, there is a vital difference in the legal structure of a building society account, as opposed to a bank account. This is because a building society is a mutual organisation. actually owned by its account holders. Thus, an account holder is technically an owner, which is not the case with a bank where the depositor's rights are restricted.

The taxation situation is exactly the same as for bank deposit accounts as explained above. Building societies can also offer stakeholder deposit accounts.


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