Opening a savings account: 7 things you need to know

Do you keep meaning to start a savings pot but aren’t sure where - or when - to even start? Here's seven tips to help you choose the savings accounts that'll best help you reach your goals.

So you know you want to save to give yourself a secure financial cushion, but where exactly are you supposed to put the money you set aside? Do you really need a separate savings account? What type of account should you get? And how do you get the best rate? When you start thinking about the specifics it can all get a bit confusing, so here's 7 tips to help make sure you pick the best option for you.

People with a savings goal save, on average, £550 more a year than those who don’t have a goal (NS&I). So, while setting one isn’t strictly necessary, it may help you save more and more quickly. But crucially if you know why you're saving it will make it easier to choose the best kind of account for you.

There are many types of savings accounts on the market, such as easy access accounts and ISA’s. The different types of accounts all have their own characteristics and their own pros and cons. For example, if your goal is to save enough for an emergency fund, you may want your money in an easy access account so you can withdraw it at the drop of the hat. But if your goal is to save for a deposit over five years, then the account you choose might be different.

You can check out our article for a clear look at the different types of savings accounts and products.

Short term savings accounts offer you easy access to your savings and allow you to make more frequent withdrawals. But they tend to have the lowest interest rates. Examples include cash ISAs and easy access savings accounts.

Alternatively you could open a more long-term savings account, which usually offer higher interest rates. As a rule of thumb, interest rates get better the longer you tie up your money. Many long term savings accounts allow only limited withdrawals or no withdrawals at all. This makes them unsuitable if you’re saving for an emergency fund or other short-term goal.

In recent years, interest rates have generally fallen across the board, and although they've recently been put up for the first time in a decade, they're still relatively low. Having said that, there’s still a fairly sizeable difference between the best and worst rates you can get. For this reason, it’s worth having a look at what’s out there and comparing deals from different banks.

With that being said, you may find that banks will reward customers’ loyalty.

Many banks tend to offer their most attractive interest rates on so-called ‘linked accounts’. These are accounts you can only open if you already hold a current account with that bank. Interest rates also tend to be higher if you’re a premium customer, than if you have a standard account.

Also known as teaser rates, introductory offers use higher than average interest rates to tempt customers into opening new accounts. Unfortunately, these rates only last for a set amount of time - typically 12 months. After this period, they tend to drop dramatically.

The fact that an interest rate is an introductory offer should be made clear to you. Look out for a tell-tale asterisk next to the advertised interest rate. With this in mind, it’s a good idea to thoroughly check an offer’s terms and conditions before you sign up.

Make the most of introductory offers but bear in mind that rates can drop dramatically once the initial period is over. Keep an eye out for new deals as you may want to consider switching when the introductory offer is about to end.

While you can open a savings account at any time of the year, the beginning of April is usually the best time to do it. Especially if you’re planning to open an ISA (individual savings account).

An ISA allows you to earn interest on your savings tax-free. However, the amount of savings you can earn interest on without paying tax in a given year - called your ISA allowance - is capped by the government. This tax year the ISA allowance is £20,000. The tax year runs from 6th April to the following 5th April. This means you only have up to the 5th April each year in order to make the most of your allowance.

Most banks tend to face a flurry of ISA applications during the final weeks of the tax year. By opening yours as early as possible, you’ll beat the rush and give yourself a headstart on making the most of your yearly allowance.

But that’s only one piece of the puzzle.

Banks also tend to launch new deals - and new savings products - at the beginning of the new tax year. This makes April a good time to look into new offers and transfer your savings to a new account with a better rate.

You cannot carry over the unused portion of your yearly ISA allowance into the next tax year. If you don’t use it, you lose it. For this reason, you should try to use up as much of your allowance as possible each year.

This can also pay off in the long term.

Interest you earn on an ISA continues to be tax free for as long as you keep the ISA open. Even if the interest rate drops, don’t underestimate the power of small tax-free earnings accumulated over a long period of time.

If you’re unhappy with the return on an ISA, you may want to consider transferring it. Many banks accept ISA transfers and they’ll handle the switch for you.

Transferring an ISA won’t affect its tax-free status. However, do check your old ISA provider’s terms and conditions beforehand. You may have to pay a penalty if you transfer an ISA during a fixed term.

If you’re saving with a specific goal in mind, there may be a government scheme available to you which can help you reach your goals more quickly.

Here are two schemes you may be interested in:

Help to Buy ISA

These are a new type of ISA (individual savings account) that you may be eligible for if you’re saving up to buy your very first property.

After depositing a lump sum of £1,200, you save up to £200 a month into your ISA. Then, once you’re about to finalise your home purchase, you can apply for a government bonus of up to £3,000 which you can put towards your first house.

Lifetime ISA

A new scheme that launched in April 2017, a lifetime ISA allows you to save up to £4,000 a year, tax-free, if you’re under 40. You’ll also get a government bonus of £1 for every £4 of your own money you put into the ISA.

Now you know what to look for and how to get the best rates, you can make sure you open a savings account that works for you and lets you reach those saving goals.

You've now reached the end of the Savings series, but you can always revisit the How to save for long term goals and our guide to your pension options articles in the series, or why not sign up to ClearScore