Are you thinking of opening a savings account? In this guide, Latest Deals breaks down what a savings account is, the different types of savings accounts, the best savings account for you and answers any questions you may have.
What is a savings account?
With a savings account, you can set aside money for the future. You can place money in an account so that it can grow in value. This is called interest. You can apply for a savings account from most banks, building societies and savings providers.
While a bank account allows you to withdraw cash, use a debit card and pay bills, a savings account is for saving money, and earning interest. There are various types of savings accounts, and the best type for you will depend on your circumstances.
Should you open a savings account?
Before you open a savings account, you should consider whether it’s the right decision for you and your circumstances.
Before deciding on a savings account, you may want to consider:
1. Do you have debts?
If you have debts, you should check if the interest rate on the debt is higher than the interest you’d be getting on your savings account. If it is, even though you’re saving money and earning interest on it, the money you owe in debt is increasing quicker than the money you’re saving is.
For example, if you owe £2,000 on a credit card at 20% interest, it costs £400 a year, assuming a constant balance. In a savings account at an interest rate of 2%, you’d earn £40 per year. So, you’d be £360 per year better off paying back the credit card debt.
If your debt is at 0% interest, then there’s not such a hurry to pay it off. However, you should check the terms, as it’s unlikely that your debt will stay at 0% long term.
It can be important to save an emergency fund in case you are faced with any unexpected expenses. However, this doesn't mean you absolutely need to open a savings account.
If you have paid off your credit card debt, you can keep the card to be used in case of emergencies, and while you’re not using it, you won’t be accruing more debt on a credit card with high interest.
If you’re unsure whether you’d be able to reborrow money in case of emergency (for example if your debt is a personal loan), then it could be sensible to keep an emergency fund saved.
2. Do you have a mortgage?
This is a similar idea to paying off debts before getting a savings account. If you have a mortgage you should weigh up whether it’s better to pay off the mortgage more quickly, or open a savings account.
If your mortgage rate is higher than the potential savings rate, your money could be better spent overpaying on the mortgage. This means that the interest you're accruing on your mortgage is more than what you’re getting on your savings.
The best thing to do will vary according to the terms of your mortgage, and the state of your finances. If your mortgage provider and mortgage type allows you to overpay. If you can overpay, there’s normally an annual limit to the amount you can overpay by.
You should also check your mortgage terms to see what your lender will do with your overpayments. Lenders may shorten your mortgage term. This means that your monthly payments will stay the same, but you’ll get it paid off more quickly. Or, some lenders may take your overpayment off the cost of the next months’ payment, which only saves you a few days’ interest.
3. Are you on a low income?
If you’re on a low income, you may still be able to open a savings account. If you claim universal credit or working tax credits, you may be able to save money with the Help to Save scheme.
Through the government-backed scheme, you can boost your savings by 50%, up to a maximum of £1,200 over four years. You can learn more about the Help to Save scheme in our guide.
Types of savings accounts
There are various different types of savings accounts, and they all come with different interest savings rates, and different ways to pay in, and withdraw your money.
The most common savings account types are:
Easy access savings account
With an easy access savings account, also known as instant access savings accounts, you pay money in and earn interest on it while it’s in the account, and then you can withdraw it whenever you want. Usually, this account comes with a lower interest rate, as it allows more flexibility to access your money.
Interest rates are often variable, meaning they can go up or down over time, so it’s important to keep track of the account to ensure you’re getting the best return on your money.
We have a guide on this type of savings account here.
Fixed rate bonds
Fixed term savings accounts, also known as fixed rate bonds, often offer better mortgage rates than an easy access savings account. But, you can’t take out any money (except in very rare circumstances) until the end of the term.
These accounts offer a flat rate of interest, over a set period of time. So, it’s important to only open a fixed term savings account if you’re sure you won’t need to access the cash during the length of the fixed term.
If you’re wary of locking your money away for so long, or you’re worried about being stuck at a fixed interest rate, you can opt for a shorter fixed term savings account. There are options available for one or two year fixed term savings accounts, as well as for much longer terms, up to five years.
Find out more about fixed term savings accounts here.
Regular savings accounts
With a regular saver account, also known as a regular savings account, you commit to pay in a certain amount each month. This can be a helpful option if you don’t have a lump sum, but you do want to start setting aside money and earn interest on it.
With a regular savings account, interest is typically paid yearly, and you can often get a higher rate than with other savings accounts. However, there are restrictions on the account, including limits on the number of withdrawals you can make, and strict rules on monthly deposits.
Learn more about regular savings accounts here.
Notice savings accounts
If you open a notice savings account, you need to give notice when you want to withdraw your money. The notice period will depend on the terms of the account, and if you don’t follow the notice period, you will likely need to pay an interest penalty.
This type of account can be helpful if you know you are going to need your savings, but you’re not sure when. For example, if you’re a first-time buyer, searching for your first property, you could find it in a month, or ten, you just don’t know.
You can read our guide on notice savings accounts here.
Child savings account
Most savings accounts are for people aged eighteen or older. However, there are child savings accounts that are designed for you to save money for your child’s future.
These accounts can come with maximum and minimum ages depending on the account and provider, and these can be managed by parents or guardians on behalf of the child.
You can read our guide on child savings accounts for more information.
Which is the best savings account?
There are various types of savings accounts, and the one that is best suitable for you depends on your circumstances.
Before making a decision about which type to opt for you, you may want to consider:
1. What are your savings goals?
Thinking about your savings goals can help you determine which type of savings account is best suited for your needs. For example:
- If you’re saving for something more short term, such as a new kitchen or a holiday, it could be helpful to have easy access to your money, so an easy access savings account may be the most suitable.
- If you’re thinking of saving on a longer term basis, then you could get a higher interest rate with a fixed rate bond.
- If you don’t have a lump sum to save, but want to develop good saving habits, a regular saver could be a good option to explore.
Once you’ve established what you’re hoping to get out of your savings, you can start looking for a suitable account.
2. How much money do you want to save?
The amount of money you’re hoping to save may help you decide which account is best suited to your needs.
For example, with a regular savings account you’ll need to make a monthly payment into your account. If you fail to make the minimum payment, your account may be closed, or your interest rate may be lowered.
Or, if you’re saving a larger amount over several years, you may want to consider a fixed rate bond, as you may be able to get a higher interest rate if you’re willing to sign up to a longer term.
3. Do you need access to your money?
With some savings accounts, it can be difficult to access your money once you place it in the account. Before deciding on an account, you should consider whether you’ll need easy access to your cash.
If you do, you can pick an easy access savings account. These let you make withdrawals anytime you need to. The negative with this type of account is you’ll likely get a lower interest rate, as it offers more flexibility.
4. What account features are the most important to you?
Different savings accounts come with different features, depending on the account type and the provider. You may want an account with specific features, and this can help you narrow down and compare accounts.
Features to consider include:
- Monthly vs yearly interest
You need to decide whether monthly or yearly interest is more suitable for your needs. If you’re planning to save on a short term basis, monthly interest may be a better option. Often annual interest rates provide a better return, but you should check the terms of your account to find out.
- Online banking
Most banks offer online services and applications where you can manage your savings accounts.
You can use their websites and applications to access your account, check your balance and make transfers. However, some have additional features, such as tools to help you set saving goals and monitor your progress.
IMPORTANT NOTE: Some digital banks offer different savings products and services. You can learn more about Monzo’s savings options here. You can also learn more about Starling Bank’s savings options here.
- Customer service
When comparing savings accounts and their providers, it can be tempting to go for the high interest savings accounts. However, you should also compare how they score for customer service.
How does interest work on a savings account?
One of the top advantages of setting up a savings account is gaining interest on your money. When you open an account, you’ll get a percentage-based interest rate. This means that you will earn a percentage of the total amount of what’s in your account at a fixed time, usually annually or monthly.
IMPORTANT NOTE: Make sure you know when your interest will be paid (whether that’s monthly or yearly). Interest is paid on the total amount that is in your account, so, you don’t want to withdraw money from your account (if you can do so) before the interest payment date, as you’ll lose out on the interest payments.
The interest you earn can be paid into a different account, or added to your savings account, if your provider allows it. If you arrange for the interest to be added to your savings, you can make interest on the interest you’ve earned, and this is called compound interest.
Different savings accounts will come with different interest rates. The higher the interest rate, the more money you’ll make on your savings over time. You should compare interest rates and providers to find the best option for you.
Usually, accounts will have a savings limit. This is a cap on the amount of money you can place in the account to reduce how much interest you can earn. This will vary depending on the provider, so it’s important to confirm this before opening an account.
The interest rate you’ll get will depend on the account you choose and the provider. Here are some examples of the sort of interest rates you can expect from the most popular savings accounts.
|Type of savings account||Average Interest Rate|
|Easy access savings account||0.45% - 2%|
|Regular savings account||1% - 1.05%|
|Fixed term savings account (two year)||1.65% - 1.76%|
*These are average rates and are accurate as of October 2021. They will change over time and vary depending on the provider.
You can learn more about high interest savings accounts here.
Do I have to pay tax on my savings?
You don’t need to pay tax on any interest accrued on your savings up to a certain amount, as you have a Personal Savings Allowance (PSA). Your allowance will vary according to the rate of tax you pay.
|Basic rate taxpayer||Higher rate taxpayer||Additional rate taxpayer|
|Interest-free amount||Up to £1,000||Up to £500||£0|
Any interest you earn on your savings above these amounts, you’ll need to pay tax on. Basic rate taxpayers will have tax deducted at a 20% rate, for higher rate taxpayers it’s 40%, and for additional rate taxpayers, it’s 45%.
IMPORTANT NOTE: When choosing a savings account, you should factor in the rate of inflation. If the interest rate on your account is higher than the rate of inflation (3.2%), then you’re making a real return on your money.
How to open a savings account?
Once you’ve decided which type of savings account is right for you, you can compare accounts and providers to find the one for you.
Then, it’s time to open an account. With most institutions, you can set up a savings account in person at a branch, via telephone, or online.
Find out how to open a bank account here.
How safe is your money?
In the UK, most banks, building societies and savings accounts are protected by the Financial Services Compensation Scheme (FSCS), which protects your money up to £85,000 or £170,000 for joint accounts, per institution. This means that your money is protected if the provider were to go bust, and you can get it back.
If you have more than £85,000 in savings, this can be spread out across multiple institutions to ensure your money is protected.
IMPORTANT NOTE: If your provider fails to deliver your interest payments, or gives you incorrect information, you can make a complaint to the Financial Ombudsman. You can find out how to do this here.