Choosing a savings account

There are lots of different types of savings account to choose from. Fixed rate bonds, cash ISAs, regular and bonus savings accounts all offer something different. Which one is right for you?

Firstly, what is a savings account?

A savings account is an account where you deposit your money and hopefully earn interest. Unlike your everyday current account, you probably will not need to access the money often.

Some savings accounts restrict access to your money and have a fixed interest rate for a set amount of time. These fixed savings accounts often have better interest rates than easy access savings accounts. Easy access accounts may have lower interest or variable rates.

You can have more than one savings account at any one time but do not overextend yourself with how much you put away. If you do, you may not have enough left over for your day-to-day expenses.

What to look out for when choosing a savings account

Which savings account you choose depends on your financial situation and your savings goals.

Whatever you choose, it does not need to be a longterm thing. Interest rates often plummet after a year anyway, so it's worth shopping around regularly.

When you open a fixed rate savings account, set a calendar reminder for when the introductory interest rate ends. If there is no end date, then set a one year reminder so you can then reassess the situation.

Be mindful of taking your money out before a fixed deal ends though, as you may have to pay a fee.

Remember you can have a few savings accounts at the same time. This is good for those who can afford to lock away some money but also want to save regularly in smaller increments. In that case, it makes sense to look for a few accounts with different features.

Many savings accounts require a minimum deposit amount

This can be as high as £1,000 (or as low as £1). You may miss out on the good interest rates if you do not deposit the minimum amount straight away. Check the account’s basic requirements to avoid disappointment.

Some savings accounts restrict the number of withdrawals you can make

You may only be able to withdraw a few times a during a set period. If you exceed this limit, you could incur a fee, or more likely a reduced interest rate. Always check this before you apply.

Introductory bonus rates and offers often end after the first year

Do the maths and make sure that the account is still competitive compared to others.

Some accounts offer a bonus if you choose to re-invest your savings with them. But you should still always compare them against other rates. If you do not want to shop around, or do not have the time, maybe opt for a savings account with a lower but steadier rate of interest.

Risk levels vary between different types of savings account

Some, like cash ISAs and fixed rate bonds are virtually risk-free. Stocks and shares ISAs or innovative finance ISAs, have a higher level of risk involved. The amount in a stocks and shares ISA could go up and down depending on the stock markets, for example.

Beware that you could actually lose money with a riskier savings product. Or, more likely, you'll have to wait a long time to get a decent return on your investment. To get the most out of these types of ISA, you need to be able to lock your money away for a while.

Interest is paid with different frequencies with different accounts.

Some savings accounts pay interest on a monthly basis, while others pay quarterly, annually, or even on maturity of the account. Unless you need the interest from your savings for everyday living, this may not be a major consideration for you.

There are limits to how much of your savings is protected by the FSCS

96% of UK savings accounts are protected by the FSCS (Financial Services Compensation Scheme). They'll reimburse you (up to £85,000 for single or £170,000 for joint accounts) if the bank you're saving with goes bust.

Always check that your chosen savings provider is authorised by the FSCS. Otherwise, if they go bust, you could lose all the money you saved with them.

Each banking group shares the same amount of compensation. So if you have savings with different banks under the same group (e.g. First Direct and HSBC), you'd only be entitled to a maximum of £85,000 if the bank fails. If you have more than £85,000 in savings, spread it across accounts from different banking groups.

Your income tax rate influences how much you can save tax-free

If you're a UK basic rate (20%) taxpayer, you have a PSA (personal savings allowance) of £1,000 per year. As a higher rate (40% or (41% in Scotland) taxpayer, your PSA is £500. This means you can earn that much interest from your savings without paying any tax.

On top of this, you also have an ISA allowance of £20,000. This means you can put up to £20,000 per year into ISAs and not pay any tax on the interest.

What types of savings account are there?

Fixed rate savings accounts (aka fixed rate bonds)

Fixed rate savings accounts, or fixed rate bonds, offer a fixed rate of interest (usually between 1% and 2%) for a set period of time.

Generally, the longer the fixed term, the higher the interest rate offered. It's a safe option to earn consistent interest on your savings. But if the Bank of England raises the base rate during your fixed term, the interest rate on your savings would not increase.

Fixed rate savings accounts usually have a minimum deposit amount, and a time limit for depositing your funds. Unless you have a lump sum of cash that you do not need access to for a while, fixed rate savings accounts might not be for you.

Easy access accounts

Easy or instant access savings accounts generally offer a lower interest rate compared to their fixed rate siblings. But they do provide the flexibility of gaining access to your funds at any time, and without penalty.

Some easy access accounts restrict the number of withdrawals in a year, and anything over this will incur either a fee, or a loss of interest. If you're likely to need regular access to your money, always check the terms and conditions carefully.

Regular savings accounts

Regular savings accounts can offer a comparatively high interest rates. But often that high interest rate is only available for a fixed period of time.

They're generally linked to a current account, and are used by banks to lure in new customers. Regular savings accounts usually stipulate that you deposit a minimum amount – £250, for example – every month.

If you fail to make the monthly payment on time, or withdraw funds (if this is permitted at all), you could lose the preferential interest rate.

These accounts are great for reaping competitive rates over a fixed period. But once the term is over, shop around for another home for your savings. Otherwise your money will almost always revert to your bank’s ordinary savings account rate, which is usually close to 0%.

ISAs

ISAs are a great way to save tax-free. The ISA allowance for every adult currently (2019/2020) stands at £20,000 per year and £4,368 for children.

But since the introduction of the Personal Savings Allowance, you might prefer to keep your money in a high interest or easy access bank account.

Generally, when you take money out of your ISA, you lose that part of the tax-free allowance. So if you deposit £20,000, then take out £1,000, you will only earn tax-free interest on the £19,000.

Some ISA providers do permit penalty-free withdrawals, provided you return the money within a specific period of time. Check the terms and conditions of each ISA and make sure it does what you want it to do.

As with all savings accounts, you should shop around for the best rates available, and check every year that you are getting the best deal for your money.

Not all ISA providers allow the transfer of ISAs, but if you can, it's easy to switch from one provider to another, without losing any of the tax benefits. Don’t let your ISA savings languish!

Cash ISAs in 2019 have tended to have very low interest rates. Stocks and shares ISAs, such as Moneyfarm, can provide much higher returns (close to 10% per year). But they're much riskier, and you stand to lose a lot if the stock market crashes.

Innovative finance ISAs (IFISAs) usually offer between 5 and 8% per year. But again, your money is at risk.

Now read more about your ISA allowance for 2019/2020

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Last updated: 11 October, 2019

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