From fixed-rate bonds, to cash ISAs to regular or bonus savings accounts, there are many different types of savings account to choose from in the UK today. But which one is right for you? What if you need to gain access to your money while it is in a savings account? And how safe is your money in these accounts?
But first of all, let’s answer an even simpler question:
What is a savings account?
A savings account is an account where you can store your money and hopefully earn you more interest than a normal bank account. Some savings accounts are fixed, which restrict access to your savings, while others offer easy access and variable interest rates.
To work out which savings account is right for you, you should first consider your personal financial situation and what you want from your savings account. The savings account you choose today needn’t be for life. You can, and should, shop around regularly to ensure that you are always getting the best deal for your hard-earned cash. When you open a savings account, consider setting a calendar reminder for whenever your regular or introductory interest rate will end – or if there is no end date, then set a reminder for a year hence and then reassess the situation.
Further to this point, don’t forget that you can have multiple savings accounts. If you have a lump sum that you can afford to put away for a long period of time, but also want to save regularly in smaller increments, it makes more sense to look for multiple accounts with different features.
What should I look out for when choosing a savings account?
There are a number of factors you should be aware of before you decide on a particular savings account. Here are a few of them:
- Minimum deposit requirements – Many savings accounts stipulate a minimum deposit amount, which can be as high as £1,000 (or as low as £0). If you won’t be depositing a large amount initially, always check the account’s basic requirements to avoid disappointment.
- Withdrawal limits – Some seemingly regular savings accounts can have restrictions on the amount of withdrawals you can make in any given time (usually a number of withdrawals per year). 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 don’t last forever – Always bear in mind that inflated introductory bonus interest rates will run out – usually after the first year. Do the maths and make sure that the account is still competitive compared to others. Furthermore, some accounts offer a bonus if you choose to re-invest your savings with them, but again you should always compare against other rates that may be available once your current term has expired. If you are not willing, or simply don’t have the time to shop around, it may be better to opt for a savings account with a lower but steadier rate of interest.
- Risk level – Some savings accounts are virtually risk-free (cash ISAs, fixed rate bonds). More adventurous products, however, such as stocks and shares ISAs or innovative finance ISAs, have some level of risk involved. A stocks and shares ISA can go up and down with the stock markets, for example. If you choose a riskier product, be aware that you might lose some money – or, more likely, you will have to wait a long time to get a decent return on your investment.
- Interest is paid at different times with different accounts – Some savings accounts pay interest on a monthly basis, whilst others pay quarterly, annually, or even on maturity of the account. This probably won’t be a major consideration for you – unless you need the interest from your savings for everyday living expenses, for example.
- Don’t over-extend yourself – You shouldn’t be tempted either to invest too much in an account, leaving yourself stretched financially, or invest for too long a period, unless you’re certain you won’t need access to the funds during that time. Some accounts do not allow access to your funds for a given period; others will allow it, but will charge a fee for early withdrawals.
- Spread your payments to be safe – 96% of UK savings accounts are protected by the FSCS (Financial Services Compensation Scheme) up to the amount of £85,000 per account (£170,000 per joint account). This means that if your chosen savings account provider (and always check to ensure that they are authorised by the FSCS) goes bankrupt, you will be reimbursed up to this amount. What is important here is that each banking group shares the same amount of compensation – so, for example, if you have savings with both HSBC and First Direct, which are two brands of the same banking group, you would only be entitled to a maximum of £85,000 if the bank fails.
- Consider your tax position – If you are a UK basic rate (20%) taxpayer, you will have a PSA (personal savings allowance) of £1,000 per year, or £500 if you’re a higher rate (40% or 41% in Scotland) taxpayer. This means that you can earn that much interest from your savings without paying any tax. Further to this, you also have an ISA allowance of £20,000, meaning 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 (also known as fixed-rate bonds)
Fixed rate savings accounts (more properly known as fixed-rate bonds) are exactly as they sound. They offer a fixed rate of interest (usually between 1% and 2%), provided your savings remain in that account for the specified period of time. Generally, the longer the fixed term, the higher the interest rate offered. It’s worth noting, though, that if the Bank of England raises the base interest rate during your fixed term, the interest rate increase wouldn’t be passed along to your account.
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 don’t need access to for a period of time, fixed rate savings accounts might not be for you.
Easy access accounts
Easy access accounts (also known as instant access savings accounts) generally offer a lower interest rate compared to their fixed-rate siblings, but what they do provide is 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 are likely to need regular access to your money, always check the terms and conditions carefully.
Regular savings accounts
Regular savings accounts tend to offer a comparatively high interest rate – but that high interest rate is usually only available for a fixed period of time. They are generally linked to a current account, and are used by banks as a lure. Regular savings accounts usually stipulate that you deposit a minimum amount – £250, for example – every month.
One thing to note with regular savings accounts is that if you fail to make the monthly payment on time, or withdraw funds (if this is permitted at all), you will generally lose the preferential interest rate.
These accounts are undoubtedly great for reaping competitive rates over a fixed period – but once the term is over, you should shop around for another home for your savings, as your money will almost always revert to your bank’s ordinary savings account rate, which is usually close to 0%.
ISAs are a great way to save tax-free. The ISA allowance for every adult currently (2018/2019) stands at £20,000 per year and £4,260 for children, so it’s certainly worth taking a look at some ISA deals. With the introduction of the Personal Savings Allowance, however, you might prefer to keep your money in a high-interest or easy access bank account.
Generally, if 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, so long as you return the money within a specific period of time – but 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 is 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 2018 tend 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 are much riskier as well – you could 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 2018/2019