Why Christmas savings clubs are a con

Christmas clubs are a popular way of saving up for the festive season, and the number of people using them is on the rise. But they do have some serious disadvantages. Ruth Jackson explains why Christmas clubs are a con, and suggests better ways of building up your yuletide savings.

By Ruth Jackson-Kirby

published 25 August 2009

in Features

It's never too early to start thinking about Christmas - especially if you're a hard-pressed retailer. Although many kids are still on their summer holidays, Harrods and Selfridges have both had their Christmas stores open for several weeks. And other shops more anxious than ever for your money during the downturn - won't be far behind once the back-to-school stuff's gone.

Now, although I'm not suggesting we all start buying presents, listening to Slade hits or boiling the sprouts yet now's the time to start budgeting for Christmas. Last year, HSBC reckons, we each spent a whopping £480 on average on cards, presents, decorations and food. Given a lot of that money was dredged up on overdrafts and credit cards, most of us faced a very lean January. So what can you do to avoid the same financial headaches this year?

How Christmas clubs work

In the past, Christmas club savings schemes have been a popular way of saving up for the festive season. These plans help you to spread the cost of Christmas. You pay in an amount each month from £2 upwards - and then in December you get your money back. Well, sort of. Typically, you get vouchers to spend in certain stores, or you chose items up to your budget from a catalogue.

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The trouble is the collapse of savings club Farepak in 2006 saw 150,000 families left out of pocket just two months before Christmas. Fortunately, the potential for a repeat of that fiasco has been reduced, thanks to the introduction of the Christmas Prepayment Association.

This self-regulatory body covers a number of clubs including; Country Christmas, Family Christmas, Park Christmas, Variety Christmas and Post Office Christmas. If any of these clubs goes bust holding customers' money, they should get back the value of their savings in either vouchers or goods.

As a result, the number of people using Christmas savings clubs is on the rise, says Neil Craven in The Daily Mail.

What's not to like?

The big draw of these clubs for many people is that you can't access the money saved between now and Christmas, so there's no risk of spending it all on something else and being left short of cash at the wrong time. However, the flip side of this is that, should an emergency arise, you can't access the money saved either. And in the current fragile economic climate, with jobs being lost daily, that's not necessarily a great idea.

The other problem with Christmas savings clubs is that you aren't getting anything for your money other than a bit of discipline when it comes to saving. You hand your cash over each month and come December it is just handed back to you with no interest, or any other return. Worse, when you cash in, you are limited in terms of where you can spend your money as it is returned to you in voucher or catalogue form.

A better way to save for Christmas

So, a far better option than a Christmas savings club is a decent bank account such as Skipton Building Society's Christmas Saver Account. This account allows you to pay in anything between £10 and £250 a month throughout the year with balances earning 3.23% before tax. The money can't be accessed until 25th November while the account remains open. However, should you need the cash to cover an emergency you can close the account in order to get it out.

In short, you get the security of not being allowed to dip into your savings whenever you like just like a Christmas savings club - but your money earns interest during the rest of the year, and at not too bad a rate. Best of all, come Christmas your money is transferred into an instant access account so you can withdraw it as and when you need and spend it wherever you like.

The only other building society that offers a Christmas saver account is Monmouthshire Building Society. This account works in a similar way to the Skipton's account except that the money is accessible throughout November and December. And the interest rate is lower at 1.25%AER. If you know of any other banks or building societies offering better products let me know.

Of course if you trust yourself not to dip into your savings, you could get a better interest rate with a standard bank or building society account Egg currently pays 3.25% gross on balances from £1, for example But for those who don't trust themselves, some interest from a building society Christmas account has to better than none from a savings club.

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Ruth Jackson-Kirby is a freelance personal finance journalist with 17 years’ experience, writing about everything from savings accounts and credit cards to pensions, property and pet insurance.

Ruth started her career at MoneyWeek after graduating with an MA from the University of St Andrews, and she continues to contribute regular articles to our personal finance section. After leaving MoneyWeek she went on to become deputy editor of Moneywise before becoming a freelance journalist.

Ruth writes regularly for national publications including The Sunday Times, The Times, The Mail on Sunday and Good Housekeeping, among many other titles both online and offline.