What is a savings account?
A savings account is an account where you can deposit your money and earn interest on it. It’s different from a regular current account in that you won’t use it to withdraw cash or pay bills, and you won’t have a debit card associated with it. Instead, the account is one in which to save your money and get a return on the amount you deposit.
What are the types of savings accounts?
There are many different types of savings accounts which cater to different savings needs. Some offer a high rate for locking your money away for a set period of time, and others offer a slightly lower return but give you the benefit of being able to access your money whenever you like.
For most savings accounts – all except cash ISAs – interest is taxed once it exceeds your personal savings allowance (which ranges from £500 to £1,000, depending on your tax band).
Whatever your savings needs, here’s a roundup of the main types of savings accounts available.
An easy access account, or instant access account, does just that. It makes it easy to access your savings. These accounts have no restrictions on when and how much you can withdraw; they tend to have a lower rate of interest as a result. But the big benefit of an account like this is that it doesn’t lock your money away for a period of time.
A notice account requires you to give notice when you want to withdraw cash, otherwise you will be required to pay a penalty charge. These tend to be high-interest savings accounts.
This is an account where you deposit your money for a fixed time (1–5 years). Your money is tied up and you won’t be able to access it until the end of the set term, but interest rates tend to be higher as a result.
With a regular savings account you are required to deposit a set amount each month. Access conditions vary, but interest rates tend to be higher than for instant access accounts.
An ISA is a tax-free way of saving – although it is unlikely you will earn more interest than your personal savings allowance. Accounts allow you to save up to your ISA limit (£20,000 per year for the 2020/21 tax year), and any interest earned will not be subject to tax. Access conditions vary depending on what type of cash ISA you take out.
There are a range of savings accounts for children. A parent or someone with parental responsibility can set up an account for a child and hold it in trust until the child is a specified age.
When it comes to tax, if a child gets more than £100 in interest from money given by a parent, then the parent will have to pay tax on all interest if it’s above their personal savings allowance. But apart from that, there’s usually no tax to pay on children’s savings accounts.
Savings accounts vs current accounts
As banks vie for our business, the line between savings and current accounts is sometimes blurred. However, there are some key differences for savings versus current accounts.
A savings account is somewhere for you to deposit your money with the intention of leaving it there. Such accounts have interest rates attached; how high will depend on the type of account you choose. A large benefit is that your money is stashed away, out of sight – so there is less temptation to dip into it.
Current accounts are more transactional. They are meant to be used on a day-to-day basis. This means they are very accessible; money can go in and out without any restrictions. However, it does also mean that they typically have low interest rates or pay no interest. If you do have a current account with an interest rate attached, it is likely you will need to meet certain conditions to qualify for this interest.
How much should I keep in a savings account?
The balance of your account, or how much you should save, is dependent on your personal financial situation. However, it is advisable to aim to build up at least three months of essential outgoings in an emergency fund. This is just so you are prepared for the unexpected.
If you want your savings to be protected in case your bank or building society should fail, then try to have no more than a maximum of £85,000 deposited with each financial institution. The Financial Services Compensation Scheme (FSCS) will protect up to £85,000 (or £170,000 held in a joint account). But do note that this is not per account, it is per financial institution. So if you have multiple accounts with one bank, make sure that the sum total of your money in these does not exceed the threshold.
What to look for in a savings account
As already mentioned, there are many different types of savings accounts and the choice can be sometimes confusing. It is therefore a good idea to have an idea of what you are looking for in a savings account.
Here are some of the main deciding features when it comes to savings accounts:
Access – Do you need to access your cash quickly, or can you lock it away for a set period of time? What level of accessibility you need will dictate the type of account to go for.
Interest – The main aim with savings accounts is to get the best possible return on your deposit. A decent interest rate is key. However, interest rates vary wildly between accounts. Also bear in mind that some interest rates include an introductory bonus which will finish after a certain period of time.
Frequency – Are you looking to deposit one large sum, or are you thinking of making more regular savings? If you are able to put something aside each month, you may benefit from a regular saver account, whereas if you have a lump sum, then a fixed-term account could provide you with larger returns.
Tax – Since the introduction of the personal savings allowance, cash ISAs have become less needed as the majority of savers won’t pay tax on their savings interest. However, if you expect to exceed your personal savings allowance, then you may want to consider something like a cash ISA.
How to open a savings account
Once you have a clear idea of what you want from it, the next step is to open a savings account. But how do you go about doing this?
The first thing is to check with your chosen provider how the account can be opened. For some, you will need to go into the branch, while others can be opened online or over the phone. All this should be explained in the information about the account.
When completing your application, you will typically be required to provide your address, occupation and current bank account details. You may be asked to provide a form of ID and proof of address as part of fraud prevention measures. If you are applying in branch, this will mean showing photo ID like your driving licence or passport, and something like a council tax bill or utility bill. If you are applying online, these documents (or verified copies of these documents) may need to be sent to the provider by post and returned to you once checked.
How to close a savings account
Closing a savings account is relatively simple. However, if you are trying to close a fixed rate or regular savings account before the end of the set term, you may face a penalty charge – so it is best to avoid doing this if possible.
Meanwhile, for most savings accounts, banks or building societies allow you to close the account online if the account’s balance is less than £5, or if you have another account with that bank to transfer the closing balance to.
For some accounts you may be required to write to your financial institution to close the account and provide it with information about where any remaining funds should be transferred.
How to compare savings accounts
As there are so many different options available, it is good to compare savings accounts before committing to one. You can easily do this through online financial comparison sites, but it is best to know what to look for in an account in order to make a like-for-like comparison.
Here are our top tips on how to compare savings accounts:
- Interest rate – This is one of the key features to compare, as it will determine what return you will achieve on your savings. Try to compare interest rates with like-for-like accounts, and remember to look for rates that are higher than the rate of inflation.
- Introductory bonus rate – When comparing interest rates, look at whether the interest rate includes an introductory bonus rate. These can be a good way to access a higher rate, but you will need to be quite hands-on with your savings and happy to switch to find the best deal.
- Access – Compare levels of access with several accounts. For example, if you are looking at notice accounts, some may allow a set number of withdrawals during the term or allow no withdrawals.
- Amount – How much are you looking to save? Some accounts have a minimum deposit, while others may have a maximum level of investment.
- Account management – How would you like to manage your account? Are you happy to do it all online or do you prefer the face-to-face approach? Remember to compare products and consider whether the way your chosen account is managed suits how you conduct your finances.
Is a savings account right for me?
Developing a savings habit is a sensible financial move. However, whether a savings account is right for you depends on your personal circumstances. For example, if you have high levels of existing debt, it may be a more sensible financial move to pay that down before committing money to savings.
But if you are looking to set money aside for emergencies, save towards a goal or just tuck away a large sum, a savings account can provide a safe place to store your money and provide you with a return.
The most important thing when picking a savings account is to select the right one for your circumstances. Do you want to start small and be able to dip into it whenever you like? Or do you have a large sum that you want to stash away for a few years? Whatever you decide to go for, try to do your research and make sure you compare products in order to get the best deal for you.