Which savings account is right for me? | The bank rate
If you want to open a savings account, there are several types to choose from. Fixed rate bonds, Cash ISA, regular and bonus savings accounts all offer something different.
Here we look at how you can set up a savings account, whether it’s an online savings account or one that you manage at a branch, and how to find the best savings account for your money.
What is a savings account?
A savings account is an account where you deposit your money and hopefully earn interest. Unlike your everyday checking account, you probably won’t need to access the money often.
Some savings accounts restrict access to your money and have a fixed interest rate for a fixed term. These fixed savings accounts often have better interest rates than easy access savings accounts. Easy access accounts may have lower interest rates or variable rates.
You can have more than one savings account at a time, but don’t overwork yourself with the amount you put aside. If you do, you may not have enough money left for your daily expenses.
What to pay attention to when choosing a savings account
The best savings account for you will depend on your financial situation and savings goals. It also depends on how you want to access it. You can open a savings account online and manage it electronically, but if you prefer to do it in branch, you can choose a more traditional account.
Whatever you choose, it doesn’t have to be a long-term thing. Interest rates often drop 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, set a one-year reminder so you can reassess the situation later.
Remember to withdraw your money before a fixed agreement ends, as you may have to pay a fee.
Remember that you can have multiple savings accounts at the same time. It’s good for those who can afford to put money aside, but also want to save in small increments on a regular basis. In this case, it makes sense to look for a few accounts with different features.
Many savings accounts require a minimum deposit amount
It can be as high as £1,000 (or as low as £1). You may miss out on good interest rates if you don’t deposit the minimum amount immediately. Check the basic account requirements to avoid disappointment.
Some savings accounts limit the number of withdrawals you can make
You may only be able to withdraw a few times in a given period. If you exceed this limit, you may incur a fee, or more likely a reduced interest rate. Always check this before applying.
Bonus rates and introductory offers often end after the first year
Do the math and make sure the account is still competitive with others.
Some accounts offer a bonus if you choose to reinvest your savings with them. But you should always compare them to other fares. If you don’t want to shop around or don’t have the time, maybe opt for a savings account with a lower but more stable interest rate.
Risk levels vary for different types of savings accounts
Some, like cash ISAs and fixed-rate bonds, are virtually risk-free. Shares and shares ISA or innovative financing ISAs carry a higher level of risk. The amount of a stock and share ISA could go up and down depending on stock markets, for example.
Be careful, 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 ISAs, you need to be able to lock in your money 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 when the account matures. Unless you need the interest from your savings for day-to-day 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 will reimburse you (up to £85,000 for individual accounts or £170,000 for joint accounts) if the bank you are saving with goes bankrupt.
Always check that the savings provider you have chosen is authorized by the FSCS. Otherwise, if they go bankrupt, you could lose all the money you saved with them.
Each banking group shares the same amount of remuneration. So if you have savings with different banks in the same group (eg First Direct and HSBC) you will only be entitled to a maximum of £85,000 if the bank fails. If you have more than £85,000 in savings, spread that across accounts in different banking groups.
Your tax rate influences how much you can save tax-free
If you are a UK Basic Rate (20%) taxpayer, you have a PSA (Personal Savings Allowance) of £1,000 a year. As a higher rate taxpayer (40% or 41% in Scotland) your PSA is £500. This means you can earn as much interest on your savings without paying tax.
On top of that, you also have an ISA allowance of £20,000. This means you can invest up to £20,000 a year in ISAs and pay no 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 interest rate (usually between 1% and 2%) for a fixed period of time.
Generally, the longer the fixed term, the higher the interest rate offered. It’s a safe option for earning consistent interest on your savings. But if the Bank of England increases the basic 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 to deposit your funds. Unless you have a lump sum of money that you don’t need to access for a while, fixed rate savings accounts might not be right for you.
Easy Access Accounts
Easy access or instant access savings accounts generally offer a lower interest rate than their fixed rate siblings and the best currently offer around 0.8%. But they offer the flexibility to access your funds at any time without penalty.
Some easy access accounts limit the number of withdrawals per year, and exceeding this will result in either fees or 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 can offer relatively high interest rates. But often, this high interest rate is only available for a fixed period of time.
They are usually linked to a current account and are used by banks to attract new customers. Regular savings accounts usually stipulate that you deposit a minimum amount – £250, for example – each month.
If you fail to make the monthly payment on time or withdraw funds (if permitted), you may lose the prime interest rate.
These accounts are perfect for benefiting from 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 return to your bank’s regular savings account rate, which is usually close to 0%.
Is such that
ISAs are a great way to save tax-free. The ISA allowance for each adult currently (2020/2021) is £20,000 per year and £9,000 for children.
But since the introduction of the Personal Savings Allowance, you may prefer to keep your money in a high-interest or easy-to-access bank account.
Typically, when you take money out of your ISA, you lose that portion of the non-taxable allowance. So if you deposit £20,000 and then withdraw £1,000, you will only earn tax-free interest on the £19,000.
Some ISA providers allow withdrawals without penalty, as long as you return the money within a specific time frame. 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 research the best rates available and check annually that you’re getting the best deal for your money.
Not all ISA providers allow ISA transfer, 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 tended to have very low interest rates. Stocks and stock ISAs, such as Moneyfarm, can offer much higher returns (almost 10% per year). But they are much more risky and you stand to lose a lot if the stock market crashes.
Innovative finance ISAs (IFISAs) typically offer between 5 and 8% per annum. But again, your money is at risk.