There's a wide range of savings accounts available. The best savings account for you depends on what sort of access you need to your money and how you like to run your account:
Easy-access savings account.
An easy-access savings account allows you access to your money when you need it, so you can withdraw money as and when you like without notice or penalty. The best savings rates are generally paid on accounts run over the internet, though you can also find good rates on easy-access savings accounts run through a branch, by post or over the telephone. With internet and telephone savings accounts you can switch your money easily between your current and savings accounts, but it can take a few days for money to reach the account.
Term savings account.
A term savings account may be the best savings account for you if you're happy to tie your money up for 1, 2 or 3 years. Some providers let you take money out during the term if you need to, but you will lose interest if you do so. 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.
Notice savings account.
With a notice savings account you have to give the bank or building society notice or warning - typically 1 to 3 months - that you want to take money out of your savings account. These accounts are good for people who want a reason not to dip into their account. But watch out for penalties if you do suddenly need access to your savings. And remember, banks can change their interest rates at any time without giving warning.
Regular savings account.
With regular savings accounts, you are required to deposit a certain sum each month. Providers of these savings accounts normally specify a minimum and maximum deposit limit when you open the account. The downside is you can't make lump sum deposits over and above your normal investment each month, and some providers limit the number of withdrawals you make. The upside is that these accounts can offer a good rate of interest.
ISA savings account.
With savings accounts (previously known as mini cash ISAs), you don't have to pay any tax on the interest. You can put up to £20,000 (2019/20 limits) into a cash ISA and earn tax-free interest on your savings. The rates are usually on accounts run over the internet, but there are also good deals through bank and building society branches and on accounts run over the telephone. Fixed-rate ISA accounts, which fix the interest rate for a set period of time, offer a higher interest rate than an instant access ISA but you cannot take money out of your account during the set period.
When weighing up the various savings accounts on offer, bear these points in mind:
Be clear about how much access you need to your money so you pick the right type of savings account. Fixed-rate accounts will offer a higher rate of interest but limit your access to your money.
Don't assume that if you see a high-interest savings rate advertised for your account that is what you are earning. Banks and building societies often pay high-interest savings rates to new savers and less to those who have had the savings account for a while.
Check whether the advertised interest rates on the savings account are artificially high. Some providers offer an initial bonus on the account. This makes it look like the best buy, but the bonus rate normally only applies for the first 6 months or year after which the account reverts to a lower interest rate.
Make a note in your diary of when any bonus rate runs out so you can shop around for a new high-interest savings account.
Check the small print of your savings account. For example, are there any restrictions on the number of times you can take out money?
Savings accounts pay you an Annual Equivalent Rate (AER) on your credit. The rate indicates what the amount would be if interest was paid and compounded once a year. Compounding is when interest is added onto a deposit each month with the new interest based on the newly calculated deposit figure. The higher the AER, the more interest you'll earn on your money.
Net interest (tax deducted) can be credited to your account monthly or annually, depending on the account. If you don't earn enough to pay tax, you may receive your interest gross (i.e. no tax deducted). Fill out an R85 form available at the bank or building society.
Everyone has a £20,000 annual ISA investment allowance (2019/20 tax year). You can split these between stocks and shares ISA and cash with either the same or a different provider.
Cash ISA savings accounts work like any other savings account. The only difference is that all the interest you receive is tax-free. You can choose an instant access cash ISA savings account or opt for a notice or fixed term cash ISA savings account which may pay a higher rate in exchange for you having to give notice to withdraw your money.
AER This stands for Annual Equivalent Rate and tells you how much interest you will earn from your credited account over the course of one year.
Easy-access savings account An easy-access savings account allows you immediate access to your money without having to give any notice or pay any penalty.
Gross interest This is the rate of interest before deduction of income tax.
ISA savings account An ISA savings account allows you to invest up to £5,340 in cash each tax year without paying any tax on the interest on this money.
Net interest This is the rate of interest after the appropriate rate of income tax has been deducted.
Notice savings account A notice savings account requires you to give notice (typically one to 3 months) that you wish to withdraw your money.
Regular savings account A regular savings account requires you to save money on a regular basis by investing a set sum each month into the account.
Term savings account A term savings account (sometimes also called bond accounts) require you to tie your savings up for a specific period of time in return for a higher interest rate.