How does a savings plan work?

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A savings plan consists of planning an investment. It does this by planning regular cash payments with the aim of reaching a certain amount of capital. This type of investment is primarily aimed at private savers and is offered either by a asset management company (AMC) or by a bank. In general, savings plans can be divided into two categories: the fund savings plansbank savings plans. A savings plan can, of course, also be conducted without investing any money, simply by setting aside one's savings. However, one does not benefit from the possible returns that would result from reinvesting capital on the financial markets.

The Fund Savings Plan

Savers who opt for a fund savings plan regularly pay in a fixed amount. Corresponding fund units are automatically purchased for this amount at the current price. As a result, the saver acquires fund units at an average price over the course of the year, which has been proven to be a lower-risk investment than a one-off purchase with the same sum of money. This form of saving goes hand in hand with all the features of an investment fund, for example with regard to costs (asset-based fees, as well as redemption, administration and performance fees) or the periodic return mechanism (see also A fund savings plan – What is it?).

Savings plans from small amounts per month are widespread. This form of savings is particularly attractive due to the possibility of participating in the development of the stock markets with small amounts, even if it entails a higher risk compared to other savings plans. When you pay into a fund savings plan, you invest your own capital in the financial markets. That means you have a higher risk/opportunity profile.

The Bank Savings Plan

The savers who choose a bank savings plan ensure that a fixed portion of the money in their account is regularly transferred to a savings account. One of the most common purposes of this savings plan is to raise money for retirement (on retirement-related savings see also What do supplementary and private pensions mean?). Another purpose is mortgage lending. The bank savings plans are subject to the jurisdiction of bank deposits and are therefore considered to be very secure. However, they achieve rather low yields.

The ETF Savings Plan

There are also other types of savings plans that depend, for example, on the composition of an investment portfolio (e.g. a stock savings plan or a sustainable savings plan). A variant of the fund savings plan that’s in high demand is the ETF savings plan. This functions as a ”passive” investment fund, i.e. it tracks a stock market index such as – for example – the Ftse 100 or Xetra Gold.

What is ISA?

In the UK, there is a form of savings that allows for attractive tax advantages. It is a rather versatile form of saving: Individual Savings Accounts (ISAs)1 . There are at least four types: a) cash ISA, b) stocks and shares ISA, c) innovative finance ISA, d) Lifetime ISA. This allows savers to save through multiple categories of financial products: shares, bonds, investment funds, but also alternative finance instruments (i.e. peer-to-peer loans). This instrument can be underwritten with a wide variety of institutions: from banks to building societies, from stock brokers to credit companies.

The Objective and Costs of a Savings Plan

Compared to one-off investments or simple savings accounts, savings plans offer a personalised and long-term investment. Of course, it is also possible to set up a short-term savings plan, if the intention is to procure an amount for a particular or an extra expense or else to have a sum set aside quickly in case of an emergency. It can also be added that a savings plan can also be useful to combat the effect of inflation. One of the necessary conditions for a savings plan to work effectively is to clarify one's financial goals2 . If you open a savings plan, however, you should pay attention to the fees, because they can have a strong impact on returns.

Related topics:
In this article, we mentioned other topics that you may find useful to explore:

1 https://www.gov.uk/individual-savings-accounts/print
2 https://www.ybs.co.uk/savings/short-and-long-term-savings/index.html

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