Are Christmas Clubs the best way to save?

Christmas Clubs claim to help you spread the cost of festivities over the course of a year. But what are they, how do you choose the right one and are they really the best way to save?

What is a Christmas Club?

A Christmas Club is a form of savings scheme, designed to help you spread the cost of Christmas over the course of 12 months. The benefit of this is that you avoid a last-minute spending splurge that is often funded by credit cards, resulting in a large amount of debt to repay.

How do they work?

Quite simply, you pay something like £2 or more into the scheme each month and, in December, you get your money back. In the meantime, your money is 'locked in' - that is you can't access it until December, so there can be no temptation to blow the lot on a holiday in August.

Actually, it is not entirely true that you will get your money back. In most cases, the club will send you a catalogue to buy from using the money you have saved, or you will be sent vouchers that can be spent in certain high street stores.

Will my money earn interest?

No, not normally. Your money will not earn interest and you will just get back whatever you paid in over the previous 12 months. 

Can I access my money in an emergency?

No. As set out above, in most cases, your money is entirely locked in - you simply cannot access it until the start of the Christmas period and, even then, it will most likely be paid to you in the form of vouchers or must be spent via a catalogue sent to you by the club operator.

What if the Christmas Club goes out of business? Is my money safe?

Whether your money is safe will depend on the scheme you choose. In 2006 the Farepack Christmas Club scheme went out of business, leaving 150,000 members without a penny of their savings. 

The good news is that the Farepack collapse led to a review of the Christmas Club industry and the establishment of the Christmas Prepayment Association (CPA) - a 'self-regulating' industry body - as well as a 'code of conduct' designed to provide customers with greater protection.

If you choose to join a Christmas Club that is a member of the CPA you will have better protection than if you join one that is not a member. You can find out which Christmas Clubs are members of the CPA by visiting their website.

However, no matter what Christmas Club you choose, your money will not be protected under the Financial Services Compensation Scheme as it would be with a traditional savings account. This protects the first £85,000 a person per financial institution in the event your savings provider goes bust. 

Should I use a Christmas Club to save for Christmas?

For most people, the answer to that question is likely to be 'no'. The only possible benefit of saving via a scheme that pays no interest, provides no access to your money in an emergency and offers little flexibility in the way you can spend your savings is that these schemes stop you from blowing your Christmas savings earlier in the year. So, if you are terrible at saving money for a specific purpose, then a Christmas Club might be for you.

What are the alternatives?

There are a few other options. Here is a rundown of their pros and cons:

Supermarket saving schemes:

What are they? Operated by most of the main supermarkets, these schemes usually take the form of a special card, which you can add money to at the checkout each time you visit the store. Some cards also allow you to top up online from the comfort of your own home. Most schemes do not pay interest as such, but will provide 'bonus credits' - i.e. extra funds are added to your 'account' each time the balance on your card goes above certain pre-determined thresholds.

What are the benefits? The addition of 'bonus credits' to your account means you are 'in effect' earning interest on your money - though not very much

What are the downsides? You can usually only spend your money in one store - the supermarket operating the scheme. This really limits the potential of these schemes to help you spread the cost of all of your Christmas spending.

Instant savings accounts:

What are they? Instant savers are savings accounts operated by most banks and building societies. All will pay regular interest on your savings and will allow you to pay money in at regular intervals, or whenever you can.

What are the benefits? The main benefits are in the payment of interest on your savings and in the fact that you can access your money whenever you want, for the most part without penalty.

What are the downsides? Any downsides are pretty marginal and are in comparison to other savings account options. That is, having instant access to your money comes at the expense of a higher interest rate. 

Notice savings accounts:

What are they? Notice accounts are very similar to instant savers, except that you must give notice (anything from two to six weeks usually) before you can access your money.

What are the benefits? You will usually earn better rates of interest on a notice savings account. Again, you will usually be able to pay money into the account on a regular basis, or whenever you are able.

What are the downsides? The main drawback is that since you must give notice before accessing your money, you must remember to do so in plenty of time - to ensure you have access to your money in time to pay for Christmas. 

Regular savings accounts

What are they? As the name suggests, regular savings accounts are those that require you to make regular (usually monthly) deposits over the course of a year.

What are the benefits? This type of savings account often offers a competitive interest rate for the first year. Normally, that would mean moving your savings to a different account every 12 months - however, this becomes unnecessary if you are saving for Christmas, since you will clearly take most of the money out and spend it each year.

What are the downsides? In many cases, there are strict limits on how much you can save - either minimum monthly payments into the account or maximum total savings balances, or both. For example, you might have to pay between £25 and £300 into the account each month. In addition, many accounts will not permit penalty-free withdrawals during the 12 months.

Cash ISAs

What are they? Cash ISAs are savings accounts on which you will not pay any tax. Each tax year (starting April 5th) you get an ISA savings allowance, so they're well worth taking advantage of. The rates of interest paid on cash ISAs varies from provider to provider, so it is well worth shopping around to find the best deal.

What are the benefits? There are many benefits to putting your money in an ISA. First of all, you will make use of your annual tax-free savings allowance (If you don't use it, you lose it). Secondly, if you shop around, you will be able to find an account paying good rates of interest and which still allow you to access your money when you need to.

What are the downsides? There are not many downsides to using an ISA to save money. However, if you are saving specifically for Christmas, the fact that ISA allowances run from April to April is not ideal. That is, opening an account in April and then withdrawing your money in December would only give you eight months to save for Christmas.

Equally, if you use your entire ISA allowance in those first eight months, you will not be able to put money back in and save for next Christmas until your new allowance begins in the following April.

NOTE: Remember it is vital that you check the terms and conditions of any savings account before you commit - don't just look at the interest rate. In particular, since you will be saving for a specific purpose and will need the money at a specific time, make sure you pick an account that will allow you to withdraw your money when you need it - and make a reminder note in your diary if you have to give notice before withdrawing your money.