How do I compare savings accounts?
When searching for the best ISA savings rates, it’s important to know how to complete a savings account comparison, so that you can find the right one for you.
Not all ISA accounts and savings accounts are the same so knowing what to look out for can save you time and money.
With interest rates at a record low, consumers are struggling to get a return on their hard-earned savings, but there is a way to make the most of what’s available on the savings market.
By comparing the savings accounts’ Annual Equivalent Rate (AER) you can work out how much money you will be credited with on top of your savings each month.
The higher your savings rates’ AER, the more interest you will earn on your savings.
The second thing you will need to compare is length of the savings rate.
You may notice that some savings accounts say 1-year fixed-rate or even 5-year fixed-rate.
This means that the AER you get will be fixed for a set number of years.
Fixed-rate savings accounts can usually offer better rates because they require you to keep your savings with them throughout the term.
If you can take the risk of not needing to dip into your savings throughout the term, then they can work out well for consumers.
However, if the Bank of England’s interest rates rise during that term, your fixed AER will continue to depreciate. By the same token, if they lower during that term, then your AER will actually become more valuable.
It’s sensible to monitor the Bank of England’s rates and assess whether the bank rate will rise or fall, but if you’re not comfortable with the risk of a fixed-rate savings account, then you can search for the best instant access savings accounts.
Instant access savings accounts
Instant access savings accounts give you a higher AER interest than standard bank accounts but are usually lower than fixed-term savings accounts.
The benefit of having an instant accessing savings account is that you can dip into your savings whenever you need to, while still accumulating interest.
However, the amount of interest credited into your account each month will fall if you take any of your money out.
This is because the AER is based on the money currently in your account, rather than the amount you had at the start of the month.
Some bank accounts will offer higher AER savings on the basis that you make it your main bank account.
This means that your income goes into this account and all of your Direct Debits are paid out of it.
If you compare savings accounts carefully you may find some instant access savings accounts work out better than some fixed-rate accounts.
What are ISA savings?
Individual Savings Accounts, or ISAs are tax-free savings accounts. Most accounts will automatically have 20% tax deducted from the interest credited to your balance.
With an ISA, that won’t happen, so you will receive the full AER on your balance up to £11,760 (as of April 2014).
Your tax-free interest will be based on your balance over the course of the tax year, which runs from April 6 to April 5 the following year.
There are three main types of ISA: Instant access cash ISAs; Notice cash ISAs; Fixed-rate cash ISAs.
Instant access ISAs allow you to withdraw money whenever you want without any charge, but obviously this can affect the amount of interest your account will be credited with over the full tax year.
Notice Cash ISAs, as the name suggests, require you to provide notice of between 30 and 120 days, before you can withdraw any money.
Fixed-rate ISAs, like other fixed-rate savings accounts, keep y our money tied up for a term between one and five years. This guarantees you that rate for the full term, which can work out better than other savings rates, but remain risky if you’re unable to go without the safety net of your savings or if the Bank of England increases its rates.
The best ISA savings rates may be in the fixed-rate ISAs so you’ll need to consider whether or not you can afford to be without your money for one year, or possibly longer.
How to compare savings rates
Before you make a savings account comparison, look at how much money you can afford to put away each month.
If your savings can continue to grow over a prolonged period of time without the need to dip into your balance, then you may wish to consider a fixed-rate savings account.
As mentioned previously, however, you’ll need to weigh up the risk of your investment depreciating if the Bank of England increases the bank rate above your savings account’s AER.
If, for instance, you have over £20,000 in savings, then you may wish to consider putting the first £11,760 of it into a tax-free ISA savings account, and the rest into another savings account.
This would allow your savings to accrue a higher amount of interest than if you had the full amount in the same taxable savings account.
Instant access ISA savings rates are always good value if you don’t have that much in your bank to keep hold of.
The interest you gain without tax will make it easier to accumulate more money without keeping your savings tied up for a lengthy spell.
If you’re unsure about opening up a separate savings account, speak to your current bank and see what savings rates they offer.
These accounts usually tie-in with your usual current account, which can make it easier to transfer money to and from.
However, it’s important not to get tied down, as your current bank may not be providing the best savings account rate for you.
Shopping around will always help, especially if your bank lowers their savings rates after each year, so you may wish to keep your options open if that happens.
Ultimately, making a savings comparison depends on how much money you have in your savings and what you can afford to be without, for how long, and if the bank rate will fluctuate enough to depreciate your AER.