Opening a savings account is a great way to earn interest on the money you’re saving. There are various types of accounts available, which will allow you to put money away regularly and benefit from the best saving rates offered by the banks.
The best savings account for you depends on the type of access to your money that you require and how you like to run your account.
With so many options, which type of account should you choose, and, which provides the best saving rates?
Are you earning enough interest?
It could be time to find a new savings account, find and compare ISAs with our partner money.co.uk.
Why should you open a savings account?
The benefits of saving regularly means that you’ll be able to see your money grow, and have access to funds for emergencies or future plans.
For many, this means saving for university, buying a new house, or even saving for a well deserved holiday. All are easier to envision with a pool of savings available.
Before you open a saving account, it’s a good idea to compare saving accounts, to find the best one for you.
Within this guide we will look at five different savings accounts.
Easy access, notice, regular savings, ISA, and fixed term savings
Easy access
Easy access savings accounts do exactly what the name suggests. They offer you the flexibility you may need to access your accounts as you would a current account.
Most accounts will come with an ATM card, giving you access to your money when you need it. These are simple accounts that let you earn interest on your bank account balance.
The best savings rates are generally paid on accounts you run over the internet. Although with the right savings account you can also earn good rates on those you run through a branch, or post or over the telephone.
On internet and telephone savings accounts you can switch your money easily between your current and savings accounts.
Easy access usually also suggests they’re easy to open, and can often be opened online with an initial payment of around £1.
Advantages
- Small deposit amount
- Instant access to your money. So good for emergencies
- No fee for withdrawal
- No maximum saving amount, and save when you want
Disadvantages
- Usually have lower interest rates
- Possibility of paying tax on the interest
- Easy access to account, can make it harder to save
Good to have if you're saving for: emergencies
Fixed-Term savings accounts
Fixed-Term accounts also known as fixed-rate bonds, may be the best savings account for you, if you're happy to tie your money up for one, two or three years.
As the name suggests, they let you save money for a fixed amount of time, earning you interest whilst you save. Some start at six months and others last up to five years. It's sometimes possible to take money out during the term if you decide you need it, but you will lose interest if you do.
In return for tying up your money, you earn a fixed rate of savings interest over the term. These accounts often pay the best savings rate, but there's a wide gap between the best savings account rate and the worst.
Unlike some savings accounts, the interest is only paid at the end of the term. When the term ends, the money and interest is usually transferred into a current account.
Advantages
- Guaranteed interest rates for a fixed period of time
- Allows you to invest a lump sum amount
- Can offer better investment options than an easy access account
Disadvantages
- You're tying your money up for a specific period of time, with the intention not to spend
- If you’re allowed to withdraw money during your ‘fixed term’, you will lose out on the maximum interest amount
Good to have if you're saving for: future plans
Notice savings accounts
A notice savings account requires you to give your bank or building society advanced notice before withdrawing any money.
This is usually between 30 - 90 days. But they can change the interest rates at any time without giving you warning.
If you require your money earlier than the required notice period, you may have to pay a penalty amount.
Advantages
- A notice period makes it difficult to withdraw money frequently
- You can earn a high interest rate
Disadvantages
- Having a notice period, can also be considered a disadvantage withdraw money
- Subject to fine/penalty for early withdrawal
- You have to state how much you wish to withdraw
- Not suitable for emergency situations
Good to have if you're saving for: a house or future plans
Regular savings account
A regular savings account requires you to pay a certain amount into the account each month. The range will vary depending on the bank or building society.
You're often required to keep up with the terms and conditions of the account, such as making monthly payments. The account is open for a year, before turning into a standard savings account. If not, the account could be closed and you will lose out on the potential to earn interest.
Advantages
- Potential for higher interest rates
- Good for new savers
- Helps form habit of saving/provides structure
Disadvantages
- Interest is paid at the end of the 12 months
- Account becomes a standard savings account after a year, meaning the rate will not remain the same
Good to have if you're saving for: being more responsible/getting into a habit of saving
Individual Savings Accounts (ISAs)
An Individual Savings or investment account most commonly known as an ISA, allows you to save your tax-free account for the year.
Examples of an ISA include, Help to Buy ISA (no longer open to new applicants), Lifetime ISA and a Stocks & Shares.
Some ISAs do have restrictions on how much you can save in them per year, such as the Lifetime ISA, which has a maximum amount of £4,000.
The current tax allowance for an ISA is £20,000 (2020-21).
Advantages
- You can save in multiple ISA accounts, as long as you don’t exceed your tax allowance for the year
- Your savings in these accounts are tax-free
Disadvantages
- Unused allowance for the year doesn't get carried over into the following year
- After April 2021 the lifetime ISA will return to charging a withdrawal fee
- With some ISAs once you withdraw money, you can’t then replace the amount you have withdrawn. For example, if you paid £200 a month into a Help to Buy ISA you can’t put £400 into that account the following month
Good to have if you're saving for: a new house, car, university
Are you earning enough interest?
It could be time to find a new savings account, find and compare ISAs with our partner money.co.uk.
Finding the best saving rates
There are thousands of savings accounts on offer from banks and building societies. While some pay very high savings rates, others don’t, but finding the best saving rates is an essential first step to making the most out of your money.
The best savings interest rates can earn twice as much as in accounts with the worst saving rates.
Best savings interest rates
Being loyal to your bank is no longer the way to save. It’s now best to find a bank that can offer you the best interest for the money you're investing.
Banks and building societies regularly launch new accounts and it's these new savings accounts, which often pay high interest savings rates.
If you already have a savings account, check the rate you earn and if it’s poor, switch to one with a high interest rate. Such a move can mean you earn much more on your savings.
Consider online savings account
The best savings rates tend to be offered by accounts you run over the internet. This is because they’re cheaper for a bank or building society to run and they pass on the cost savings in higher interest rates.
If you prefer to run your savings accounts through a branch or over the telephone, you might end up earning slightly less interest, so it's important to compare accounts and find the best saving rates possible.
Best saving rates? Read the small print
Check out the terms and conditions. Some pay a high interest savings rate but limit the number of times you can take money out of the account to, say, four a year.
Some high savings rates are boosted by an ‘introductory’ bonus, which you only earn on your savings for a short time. Once the bonus period runs out, you are left with a much poorer deal.
Compare high interest current accounts
Some current accounts can offer a better rate than some of the best cash ISAs on the market, so have a look around to see what’s available to you.
The obvious disadvantage to a current account is that your interest will be taxed, so the attractive rate advertised may not be as good as it sounds. It’s worth calculating the tax before comparing high interest current accounts with ISAs.
Getting into the habit of saving money will make it easier for you to do it. The best way to start this habit is to consider putting some money aside on pay day. This way you know how much money you have left after bills and living expenses, to put into savings each month.
Are you earning enough interest?
It could be time to find a new savings account, find and compare ISAs with our partner money.co.uk.