In this guide, we explain how current accounts and savings accounts work to help you decide which type of account is right for you.
A current account is usually the best option for managing everyday transactions, such as paying bills and withdrawing cash, whereas a savings account is more suitable for keeping spare cash safe and earning interest on that money. While having a current account is almost mandatory if you live in the UK, you might think that having a savings account isn’t as necessary. In reality, depending on your financial situation, you may benefit from having both types of account.
Note that money kept in both a UK current account and savings account is protected by the Financial Services Compensation Scheme (FSCS), which insures deposits of up to £85,000 per person, per banking group.
Below we have outlined the main features of a current account:
Easy transactions: traditional current accounts are transactional accounts, meaning banks expect you to frequently take out money, with few restrictions on the timing or amount of those transactions.
To help make those transactions as convenient as possible, current accounts typically come with the ability to make payments with a debit card, via mobile banking apps or through direct debits and standing orders
Typically fee-free: most current accounts in the UK are fee-free, unless you opt for a packaged current account or reward current account where you’ll usually pay a monthly fee in exchange for cashback, rewards, or other perks. There may also be fees if you try to pay a direct debit or standing order and don’t have enough money in your account
Overdraft facilities: many current accounts offer an overdraft facility which allows you to spend more than you have in your account. Since April 2020 banks have been unable to charge daily or monthly fees on overdrafts but instead you’ll be charged a standard annual rate of interest. If you plan to use an overdraft regularly, try to look for one that offers an interest-free overdraft for a set time
Online access: you can usually bank on the go by organising and sending payments online when you’re out and about
Longer-term investment: savings accounts are closer to a form of investment than a transactional account. You’re giving a bank access to your cash, typically for longer periods of time than with a current account, so the bank can loan out almost all of it to earn a return
Harder to spend: most savings accounts, by design, make it harder to spend your deposited money directly. You may still get a debit card or access to a mobile banking app – but there may be a restriction on how many withdrawals you can make per year, or a minimum deposit threshold that you must exceed. In the case of fixed rate savings accounts, your funds will be completely locked away until the account matures – but you’ll be rewarded with a higher interest rate
Few fees: with savings accounts, banks make money off the “spread” – the difference between the interest rate they pay you and the interest rate on the loans they fund with your money. Because of that, and the fact that they don’t cost as much as current accounts to administer, banks typically charge little, if any, fees on savings accounts
Pays interest: with the Bank of England base rate at just 0.1%, the yield on savings accounts isn’t great, but it still pays to shop around and make sure you’re getting the best rate on a savings account. The best easy access savings accounts will get you around 0.7% interest today. If you can put the money away for a couple of years, a fixed rate savings account will get you just over 1%
No overdraft facility: unlike a current account, you can’t spend more than you have in the account and you will usually need to be in credit to keep the account open
Traditionally, it always made sense to have a current account so that your bills could be paid out and your wages could be paid in, while a savings account would provide a competitive and suitable home for your savings. Nowadays, however, it’s not quite so clear-cut.
Some current accounts pay interest rates that are just as attractive as some of the top paying easy access savings accounts, which means you might want to consider using your current account to house your savings.
The downside of this, however, is there are usually a number of conditions you’ll need to meet in order to get the advertised rate so it may not always be a suitable option. For example, you might have to pay in a set amount each month or have a certain number of direct debits going out of the account.
What’s more, having savings in a current account can make it easier to spend that money and, should someone get hold of your debit card, they could quite easily access all the money in your account.
In comparison, opening a separate savings account, and committing to regularly putting money into it, is a great way to start building up a savings pot that could be used as a mortgage deposit or as your emergency savings fund.
Although some savings accounts come with cash or debit cards, it’s important to note that you won’t have access to an overdraft facility with a savings account and you also won’t be able to set up payments such as direct debits or standing orders.
Some savings accounts also limit the number of withdrawals you can make each year, which means a current account is likely to be the more suitable choice for day-to-day transactions.
In other words, it is usually best to have a separate current account and a separate savings account.
If you’re worried about the hassle of managing multiple accounts, then consider getting a current account and savings account from the same bank – both accounts will usually be linked together through the bank’s mobile banking app, making it easy to move money around.