A savings account can be a great place to keep any money that you do not plan on spending for a while. This could be money that you’re saving for a holiday, a house deposit, or even retirement.
Savings accounts are attractive to many because they pay interest on the money you have saved, helping you to build wealth. (Albeit, very slowly at the moment)
The money you store in a savings account is also protected – in the UK your money is covered by the Financial Services Compensation Scheme (FSCS) up to £85,000. This gives you the reassurance that the money you have saved will be safe, even if the bank fails.
In the guide below we’re going to look at the different types of savings accounts available in the UK.
While you’re reading through, think about your different savings goals. It’s also worth thinking about if you’re likely to need to access this money. From here you can then consider which type of savings account is best for you.
1. Cash ISAs
A Cash ISA is a type of savings account that lets you earn interest on any money you save without paying tax.
With a Cash ISA you can make regular monthly payments, or you can save in lump sums. There is a limit to how much money you can add into your Cash ISA tax free.
Currently the ISA Allowance is £20,000 per year. At the start of the new tax year, you’ll get a new ISA allowance.
For many people, not paying tax on the interest earned was the biggest benefit of taking out a cash ISA. However, since 2016 all savers now get a Personal Savings Allowance. This means you can earn £1,000 tax-free in interest (Or, £500 if you’re a higher rate taxpayer).
If you’re likely to exceed your Personal Savings Allowance, then opening a cash ISA can be a good option, as your ISA allowance is in addition to your PSA.
The best interest rates are normally given to those who take out the longest fixed terms. It’s for this reason that Cash ISAs are well suited to anyone with a long-term savings plan.
Tax-Free Savings: If you have big savings and want to earn tax-free interest on your cash year after year, then you might want to take advantage of a Cash ISA.
2. Easy Access Savings Account
An Easy Access Savings Account is a basic bank account that lets you earn interest on money saved. In some cases they are called an Instant Access Savings Account.
This is because you can add and withdraw money from your account whenever you like. Without having to pay any fees or charges.
This makes them a great option for anyone beginning to build up their savings pot, or anyone saving specifically for emergencies.
These accounts often come with a card that can be used to take money out of an ATM machine. You can also transfer money between accounts. As well as pay for purchases.
Because of the nature of the Easy Access Saving account, most do however come with low variable interest rates. This means that the interest rate can fluctuate during your contract, depending on changes in the market.
New Savers: Anyone starting to save money, who might need to occasionally dip back into their savings account. Especially good for new savers as the initial payment to open an account is small – sometimes as little as £1.
Emergency Funds: Anyone setting up an emergency fund that might need to access money instantly.
3. Notice Savings Accounts
With a Notice Savings Account you agree to give your bank/ provider advance notice that you need to withdraw money.
You can still deposit as much money as you like, you just won’t be able to withdraw it at a moment’s notice. The notice could be anywhere from 30 days to 4 months. You might even be asked to specify exactly how much money you’ll be withdrawing.
Because these accounts take a little more planning, they normally come with higher interest rates. Before you open an account, make sure you check the interest rates and evaluate whether your money is better off in a more restricted account. They also require a slightly larger deposit amount – normally over £1,000 to open the account.
If you need to take money out and cannot wait until your notice date, you may face a penalty in the form of reduced interest rates.
Hitting Savings Goals: This type of account may be suited to someone who has a specific savings goal in mind. And is unlikely to need to access the money.
Less Disciplined Savers: The account might also be good for anyone that needs a little discouragement from dipping into their savings accounts.
4. Regular Savers
As the name suggests, Regular Savings Accounts require you to regularly deposit money into a savings account.
When you open a Regular Savers Account you commit to paying a set amount of money into the account each month, for a set period of time (normally one year). The set amount of money could be anything from £25 to £500 each month.
The majority of Regular Savings Accounts also limit how often you can withdraw money.
Because of the disciplined nature of this account, you’re likely to receive fairly high interest rates. If you have a steady income, and are confident that you can easily save the set amount each month, your money will work harder for you in this type of account.
However, if you miss a month’s deposit, you could face penalties which reduce the amount of withdrawals you can make on your account. A Regular Savers Account therefore might not be the best option if you’re saving the money as an Emergency Fund.
Committed Savers: If you know that you’re able to drip feed the same amount of money into your account each month then a regular savers account will suit you well. Make the most of the slightly higher interest rates.
Building Savings Quickly: The monthly commitment might mean that you are more likely to build up your savings pot quickly.
5. Fixed Rate Bond Accounts
This is a type of savings account that offers a fixed interest rate on a lump sum of money for a set period of time. That period of time could be anything from six months to six plus years.
In general, the longer the fixed term, the higher your returns will be. However, in return for the fixed interest rate, you will not be able to access any of your money until the term has been completed. With a Fixed Rate Bond you also cannot make additional payments.
If you open a Fixed Rate Bond Account at a good time, you could access a high interest rate for a number of years. You then don’t need to worry about interest rates dropping, because you won’t be affected.
However, you could argue that if you lock your money away in a Fixed Rate Bond and interest rates go up, you then won’t benefit from any increase.
One-Off Savings: If you have a large sum of money that you want to lock away for a few years, then a Fixed Rate Bond Account could be good for you. They’re also good because you can calculate the interest returns at the start of the term.
6. Tax Free Help To Save Accounts
Help To Save is a type of savings account designed for those on a low income. The account was launched as a government scheme to help anyone on Universal Credit, or Working Tax Credit.
You can save between £1 to £50 each month. At the end of two, or four years, you’ll be given a 50% bonus up to a maximum of £1,200. In total this means account holders can save up to £3,600 over four years.
If you withdraw your savings after two years, the bonus is calculated on the highest amount of money you’ve had in the account. For example, if you managed to save £1,000 you’ll get a £500 bonus, even if at the end of the two years you only have £800 in the account.
If you continue to save money using Help To Save, and then withdraw the money after four years, the bonus is calculated slightly differently. You’ll only be paid the 50% bonus on the difference between your highest balance in the first two years, vs the last two years.
For example, in years 1 and 2 you save £1,000. That’s a £500 bonus. If you withdraw all this money after two years, but continue saving into the account in years 3 and 4, saving a maximum of £1,200, you only get the bonus on the extra £200 you’ve been able to save – receiving £100.
A little complex, but well worth looking into properly before dismissing it as an option.
Low Paid Workers: This account is only available for people claiming Universal Credit, or Working Tax credit. If you’re eligible then this account is a great way for you to start building up your savings pot. Especially because withdrawals are permitted at any time.
Here we’ve looked at several different types of savings accounts you can choose from. It’s important to understand each of these options fully before opening an account.
It’s also possible that you might want to open a variety of savings accounts. Doing this can be a great way of saving money for different goals you want to achieve. For example, you could open one saving account to be used for an emergency fund. One to save for a big holiday. And another to save up for that house deposit.
If you want to compare each of these accounts, then head to the Save Money tab on Emma. From there you can compare a variety of different savings accounts in only a few minutes!
Emma is a money management app that connects all your bank accounts to track your monthly spending and subscriptions. Emma will help you visualise and take control of your finances. Make sure you aren’t overspending, and show you practical steps to start budgeting effectively.