The new year is a great time to start saving - or reassess the savings you already have. If you’re saving towards a goal, it’s important to make your money work as hard as it can. Here’s our 5 Minute Guide to the different types of savings accounts available, and how to help ensure you’re getting the best deal.
Types of savings accounts
This is the most basic type of savings account, and offers a way to save with easy access to your money. Most instant access accounts will offer a debit card, online banking or both. In exchange for ease of access, the interest rates can be less attractive than some other types of savings account - although they will usually be higher than most current accounts. An instant access account could be useful for saving up an emergency fund, as you will be able to access the money if you need it suddenly.
These accounts offer a reduced level of access, usually in exchange for a higher rate of interest. Notice accounts require you to submit a “notice of withdrawal” before you can withdraw any money. The terms vary between providers, but a notice of withdrawal usually has to be around 30, 60 or 90 days. This means that, if you need to access your account in an emergency, you are likely to incur penalties for doing so - although some providers may be willing to negotiate on this.
Regular savings accounts
If you want to get into the habit of setting some money aside regularly, this could be a good option. These accounts require you to contribute a regular amount to your savings, often with a minimum and maximum contribution amount. Bear in mind that it is often the case that you will lose some of the benefits of the account - such as the high interest rate - if you don’t stick to the limits, so check the terms of the account. There may also be a limit on the amount of withdrawals you can make, and some accounts may not allow you access at all.
Fixed term accounts
This type of account usually offers the best interest rate, but in exchange you are required to commit your money for a fixed period of time - usually around 1 to 5 years. During this time, you will have no access to your savings, and any withdrawals will usually come with hefty penalties. This type of account could be a good option if you need to save for the long term, and already have a separate emergency fund in an easy access account.
A cash ISA works like a traditional savings account, but comes with certain tax benefits. Normally, the interest you earn on your savings is subject to income tax - an ISA acts as a wrapper, shielding your interest from tax up to a set annual limit. Like other savings accounts, you can switch your ISA to a different provider to get a better rate, but it is important to remember that you must transfer your ISA instead of simply withdrawing the cash and opening a new one, in order to keep the tax benefit. Your allowance can only be used once per tax year, and if you withdraw the cash you have still used up your allowance for that year.
Top Saving Tips
- Always shop around for the best interest rate
- If your account has a special introductory rate, make sure you know when the rate ends and be prepared to switch if necessary later on
- Make sure you’re aware of any penalties associated with making withdrawals
- If your savings are held with a UK bank they come under the Financial Services Compensation Scheme (FSCS) which means that your cash is protected up to £85,000 per person, per institution if the bank goes bust
So why not take the first step towards your financial goals and review your savings today?