Smart ways to fund the future

There is more to sensible saving than putting your money away and forgetting it. Abigail Montrose offers advice

As holiday brochures fall through our letter boxes regular savers should check that they are saving profitably. For those who have not yet got the savings habit, now is a good time to review your finances.

Saving for the short term, such as for Christmas or a holiday, may limit you to bank and building society accounts. A range of accounts is available, and rates vary enormously. Many instant access accounts pay less than 1 per cent on a balance of pounds 100; others, such as Portman Building Society's instant access account, pay 4.5 per cent or more.

However, people often fail to check the rates paid. A recent NOP survey revealed that eight out of 10 people were unaware of the interest rate on their savings.

In general, the more notice you are prepared to give, the better the rate of interest you can expect. For example, Woolwich Building Society pays 1.74 per cent on a pounds 1,000 balance on its Prime Gold instant access account, but 2.86 per cent on its Premier 30-day notice account.

If you are prepared to operate your account by post, you can expect better rates of interest. Cheltenham & Gloucester pays 1 per cent interest on a pounds 1,000 balance in its instant access account, but 4 per cent on its London postal account.

If using postal accounts and notice accounts, check regularly that your money is in a live account; you may not be told if the account is closed to new business and so paying a lower rate of interest than on the live accounts.

Most savings accounts offer tiered rates of interest: the more money in your account, the more interest you receive. Some of the best-paying accounts require a minimum balance of pounds 500 or pounds 1,000, so once you have saved this amount, you should review your account.

Details of the best rates are given on the Money pages in Saturday editions of The Independent.

Also worth considering is National Savings' Investment Account, which pays 4.75 per cent interest on a minimum balance of pounds 20, rising to 5.25 per cent when you have pounds 500 in your account. You have to give one month's notice if you want to make a withdrawal without incurring any penalty.

Those looking to save for, say, two or three years, to pay for a car, or the deposit on a new home,have a wider range of options.

Some building societies and banks offer regular savings accounts that pay higher interest when a minimum amount is saved each month for a set number of years. You may only be allowed to make one or two withdrawals each year.

For example, with Bradford & Bingley's Monthly Saver account you can save as little as pounds 10 a month and earn 6.5 per cent interest - as long as you save for three years.

Not all building society savings accounts confer voting rights. So if aiming to open an account with a society that may later offer a windfall by converting to a bank, you should check the membership rights. Bear in mind that most of the likely candidates have changed their rules to reduce the scope for such "carpet-bagging" benefits.

If you are planning to save for five years or more, one of the most tax-efficient savings accounts on offer is a Tessa (tax-exempt special savings account). You can save up to pounds 9,000 over five years and, as long as you do not withdraw any savings, all interest is tax free. For details of Tessas, check the "best buy" tables in Saturday's Independent.

The stock market may give better returns than savings accounts over the long term. But it is not without risk; be prepared to keep your investment for five years or more.

The most practical way for a regular saver to invest in shares is through a unit trust or investment trust. Some regular savings schemes accept as little as pounds 20 a month.

Many unit trusts and investment trust investments can be "wrapped" in a personal equity plan (Pep), which makes all gains and dividends tax free. An independent financial adviser, or a specialist publication such as Chase de Vere's Pep Guide, can help you to choose your Pep.

If saving for 10 years or more, consider endowment plans. These insurance company schemes are tax free if kept to maturity. You usually have to make regular payments, and penalties can be severe for cashing in early.

Long-term, tax-free investments are also available from Friendly Societies, and the minimum investment may be pounds 10 a month. However, charges can be high and performance disappointing. So look closely at the Society's plan before committing yourself.