We take a look at the pros and cons of five of the most popular types of savings accounts and how to decide which kind best fits your needs.
Whether you’re saving up for a rainy day, to pay for that dream holiday or simply so that you can make the most of your retirement, chances are there’s a savings product that can help you reach your goals. The thing is, with all the choices on offer, how do you decide which type of account would work best for you?
Here’s a rundown of five popular types of savings account and the kinds of savings goals each of them might be best-suited for.
1. Easy access savings accounts
Also known as instant access savings accounts, these types of account are simple bank accounts that let you earn interest on your balance. You can deposit as much cash as you like into the account - at any time - and withdraw it whenever you want, without having to pay any fees or charges. Many of these accounts also come with a bank card you can use to make ATM withdrawals and pay for purchases.
In keeping with their ‘easy’ name, you can often open one of these accounts online in under five minutes. And the initial amount you have to pay into the account is usually very minimal. Typically, you can start with as little as £1.
- Immediate access to your money at any time, free of charge.
- Deposit as much cash as you like, whenever you like.
- Very small initial deposit.
- Low variable interest rates.
- You may have to pay tax on the interest.
Why choose an easy access savings account?
Easy access savings accounts are safe and flexible, allowing you to build up your savings at your own pace. Because you can withdraw your money at a moment’s notice without incurring any penalties, they’re well-suited to emergency funds. The flipside is that you won’t usually earn much interest compared to other types of savings accounts.
A good choice for: A rainy day or emergency fund.
2. Notice savings accounts
As the name suggests, notice accounts require you to give advance notice that you intend to make a withdrawal. How much notice is needed will depend on your bank. However, the period usually ranges from between 30 to 120 days. Some banks will also require you to specify the amount you intend to withdraw.
Notice accounts usually earn higher interest rates than easy access accounts. But even then, these rates are usually lower than other types of savings accounts. As a rule of thumb, the more notice you’re required to give, the higher you can expect the interest rate to be.
- Interest rates tend to be higher than those offered on easy access savings accounts.
- You can deposit as much money as you like, whenever you like.
- Higher minimum deposit required – usually £1,000 and up.
- You must give advance notice of your intention to make a withdrawal or risk being penalised (usually via missed interest or a reduced interest rate).
Why choose a notice savings account?
Notice accounts are a good choice if you’re saving up for a specific goal - such as a big holiday or to pay the deposit on a property - but want to retain control over how much you save each month. You still have the flexibility to save at your own pace, but the notice period discourages you from dipping into your savings on a whim.
A good choice for: Saving for a specific goal
3. Regular saver accounts
When you open a regular saver account, you have to commit to paying a specified amount of money into the account each month. Requirements vary from bank to bank, but you’ll usually need to pay in at least £25 and not more than £500 per month. You’ll also have to commit to making these regular payments for an agreed period of time, typically 12 months.
Regular saver accounts tend to attract higher interest rates than easy access or notice savings accounts. Rates can be as high as 3% per year. The trade-off is that they have strict terms and conditions and you may be penalised if you miss a month’s deposit. And you might not be able to make any withdrawals (or only a limited number of them) until the agreed term expires.
- Attractive interest rates.
- Low minimum monthly payments.
- Inflexible as you’ll usually have to pay in money regularly to the account.
- Unsuitable if you need emergency access to your money.
Why choose a regular savings account?
If you have a steady source of income for the fixed monthly commitment and want to build up a pot of savings reasonably fast, a regular savings account can be a good option. Regular savers can also be a good fit if you want to save up for a specific goal and don’t mind giving up some flexibility in exchange for a higher return.
A good choice for: Building up your savings
Mortgages in particular are approved subject to an affordability assessment and your monthly outgoings can influence how much you’ll be able to borrow. If you’re planning to apply for a mortgage soon, taking out a regular saver account may not be a good idea.
4. Individual savings accounts (ISAs)
Individual savings accounts (ISAs) work in much the same way as any other savings accounts, except that any interest you earn is tax-free. Interest rates can be fixed or variable, meaning they may change over time. ISA interest rates are usually higher than you’d find on other types of savings accounts (though typically they’re not as high as the rates offered on regular saver accounts).
On the downside, there’s a limit to how much you can deposit into an ISA each tax year. This is known as your ISA allowance. In the current tax year (2017/2018) this amount is set at £20,000.
- Any interest you earn is tax-free.
- If you choose an easy-access ISA you can still have instant access to your cash
- You can make regular monthly payments or occasional lump sums, depending on what suits you
- You can only put in up to a maximum of £20,000
- The best interest rates are only available if you tie up your money for a fixed term.
Why choose an ISA?
The biggest draw for most people is that, unlike other savings accounts, any interest you earn on an ISA is tax free. You can pay in your cash any way you like - in regular instalments or as a one-off lump sum - provided you don’t exceed the maximum yearly allowance. However, if you want to get the best interest rates, you’ll need to tie up your money, which means you won’t be able to make withdrawals for a specified term. For this reason, ISAs are usually best suited for long-term savings goals, such as putting money away for retirement.
A good choice for: Long term savings goals
- Cash ISAs, which hold your money in cash
- Stocks and shares ISAs, which invest your money on the stock market.
- Innovative finance ISAs, these allow savers using peer-to-peer lending platforms to receive tax-free interest
Stocks and shares ISAs can potentially earn much higher returns than a cash ISA. However, as with any investment you risk losing money if an investment performs badly.
5. Fixed-rate bonds
Fixed-rate bonds are accounts that allow you to deposit a single lump sum for a set period of time. This can range from a minimum of six months up to five years or even more. You’ll be unable to access your money for the duration of the term. However, you’ll receive interest every year that you have the bond, and this interest rate is fixed for the duration of the term.
In general, the longer you tie your money up for, the higher the interest rate. Some banks also offer tiered interest rates, which means the rate goes up the larger the sum you deposit into the account.
- Know exactly how much interest you’ll earn at the outset.
- The interest rate is fixed for the full term, so you won’t be affected if interest rates go down.
- You could miss out on more attractive rates if interest rates go up during the term.
- You’ll usually need to put in at least £1,000
- You can’t make additional contributions or withdrawals during the agreed term.
Why choose a fixed-rate bond?
Fixed-rate bonds can be a good choice if you have a sum of money you can afford to set aside long-term. Since the interest rate stays the same for the whole term, you’re protected from the risk that interest rates might fall in the future. You’ll also know from the outset exactly how much money you stand to earn. On the downside, you may lose out on earnings if interest rates elsewhere go up, as you’re locked into the rates of the bond.
Good choice for: Long term saving
So, if you're thinking of opening up a savings account first think about your goals - what are you saving for and when do you need to access the money? Then once you've decided which type of account suits you best, don't forget to compare between banks too. And then the last step is to save, save, save (and jet off on that dream holiday if thats your goal).