Are you making this big mistake with your Christmas savings?

Christmas is almost here, but are you making this big mistake with your festive savings? Here’s everything you need to be aware of.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Smiling diverse couple holding Christmas presents while walking through a winter forest

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

With the festive season just around the corner, many Brits are inadvertently risking their Christmas savings. Here’s everything you need to know to avoid a grim yuletide.

[top_pitch]

What are Christmas savings?

Christmas savings are just that: savings you may have set aside to pay for festive gifts, or other costs associated with the ‘most wonderful time of year’.

If you’re the organised type, then you may have started saving for Christmas earlier in the year, through a normal savings account. 

If that’s you, then aside from losing out to inflation, your savings are technically safe. That’s because all cash saved in a UK-based saving account has the full £85,000 FSCS savings safety protection. This means that if your bank goes bust, your cash is protected, up to the limit.

How can your Christmas savings be at risk?

Some savers in the UK choose to save in ‘Christmas savings clubs’.

These schemes allow savers to join them early in the year and pay in a set amount each month. As Christmas edges nearer, anything saved is converted into gift cards or vouchers. This usually happens from October onwards, though some schemes release vouchers closer to December.

While these schemes may provide a good way of instilling some savings discipline, they have their drawbacks. Perhaps the biggest drawback is the fact that they do not have any FSCS protection.

This means that if a scheme goes bust, it’s possible you’ll lose all of your Christmas savings. Sadly, such an event has already happened. In 2006, the popular Christmas savings club, Farepak, went into administration. This impacted 100,000 customers, with an average loss of £400 per customer.

It is worth knowing that some Christmas savings clubs now ‘safeguard’ cash on a voluntary basis. This is done by ‘ring-fencing’ customer balances. However, this still doesn’t provide a stone-wall guarantee that customer savings will be safe if another club goes bust in future.

[middle_pitch]

Are there other drawbacks of Christmas savings clubs?

Aside from the lack of savings safety, here are four other drawbacks of Christmas savings clubs.

1. Cancellation charges may apply

If you decide to leave your Christmas savings scheme early, then you may have to pay a cancellation charge. The amount will depend on the scheme, though 5% fees for cancelling gift cards or items ordered aren’t uncommon.  

2. You don’t earn interest

An obvious drawback of Christmas savings clubs is the fact they don’t pay any interest on the cash you save in them. While current rates on normal savings accounts are admittedly pitiful, earning a low amount of interest is better than nothing.

3. The choice of retailers may be limited

While it’s fair to point out that a number of Christmas savings clubs may offer gift cards from a choice of retailers, the fact is that any gift card effectively limits where you can spend your cash. So unless you plan to do your Christmas shopping at specific stores and you aren’t bothered about shopping around, this should be considered a big drawback.

4. Holding gift cards could be risky

Anything saved on gift cards isn’t covered by the FSCS. As a result, if a retailer goes bust and you’ve got one of its gift cards, you may struggle to spend it.

A similar event happened a year ago when Arcadia, owner of Debenhams, stipulated that gift card holders could only use them for half of an order’s value after it fell into administration.

Are you looking to save money this Christmas? See our articles revealing five festive buying tips that will help you save money. Also see, how you can avoid spiralling debt this Christmas and ten fantastic free Christmas activities.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

More on Personal Finance

Note paper with question mark on orange background
Personal Finance

Should you invest your ISA in a model portfolio?

Which model ISA portfolios offer both high performance and low fees? Hargreaves Lansdown, Interactive Investor and AJ Bell go under…

Read more »

Economic Uncertainty Ahead Sign With Stormy Background
Personal Finance

Is it time to exit emerging markets investments?

Investors may well be sitting on losses from emerging markets funds. Is it worth keeping the faith for a sustained…

Read more »

Personal Finance

Share trading? Three shares with turnaround potential

Share trading has been difficult in 2022, but which companies have turnaround potential? Jo Groves takes a closer look at…

Read more »

Man using credit card and smartphone for purchasing goods online.
Personal Finance

Revealed! Why Gen Z may be the savviest generation when it comes to credit cards

New research reveals that Gen Z may be the most astute when it comes to credit cards. But why? And…

Read more »

Environmental technology concept.
Personal Finance

The 10 best-performing sectors for ISA investors

The best-performing sectors over the past year invested in real assets such as infrastructure, but is this trend set to…

Read more »

Road sign warning of a risk ahead
Personal Finance

Recession risk ‘on the rise’: is it time for investors to worry?

A major global bank has suggested the risk of a recession in the UK is 'on the rise'. So, should…

Read more »

pensive bearded business man sitting on chair looking out of the window
Personal Finance

1 in 4 cutting back on investments amid cost of living crisis

New research shows one in four investors have cut back on their investing contributions to cope with the rising cost…

Read more »

Image of person checking their shares portfolio on mobile phone and computer
Personal Finance

The 10 most popular stocks among UK investors so far this year

As the new tax year kicks off, here's a look at some of the most popular stocks among UK investors…

Read more »