Savings accounts explained

In days gone by stashing your cash under your mattress was the best way to keep your money safe but fortunately there are now hundreds of savings accounts to choose from. However, the volume and variety of accounts available can make finding the right one a daunting prospect, so whether you’re saving for a special purpose or just want to build a nest-egg for the future, you can find out what you need to know about savings right here.

Is a savings account different than a bank account?

Unlike a bank account which is used for transacting money ‘on demand’, a savings account is designed for storing money; usually the money stored in the account will also earn interest, enabling it to grow over time. Depending on the account, there may be restrictions placed on the amount of money that can be withdrawn, the frequency or method of those withdrawals or the notice required in order to make them.

Why should I save?

Although we live in a society with a ‘buy now, pay later’ culture, having a pot of savings can provide reassurance and peace of mind in case the proverbial ‘rainy day’ strikes. Saving the money you need to make a special purchase, such as a new car or a dream wedding, can also help you avoid borrowing the funds and getting into debt.

Remember!  If you have outstanding debts then financially it may make more sense to clear them before you start saving. This is because the interest you’ll pay on your borrowings is likely to be greater than the interest you’ll earn on your savings.

What types of savings accounts are available?

There are several types of savings accounts available, including:

Easy access accounts

Also known as ‘no notice’ or ‘instant access’ accounts, these accounts provide immediate access to your money with no penalties for withdrawals. This makes them ideal accounts for ‘rainy day’ savings that you may need access to at short notice. Interest rates on easy access accounts tend to be variable and usually fluctuate in line with the Bank of England base rate; essentially this means that the rate of interest you earn can go up as well as down.

Notice accounts

Although these accounts permit withdrawals you’ll need to give advance notice of your intention to make one – depending on the account this will usually be 30, 60, 90 or 120 days notice – and if you do need the money sooner you’ll be subjected to a penalty. As with easy access accounts, interest rates on notice accounts tend to be variable. In the past notice accounts tended to offer higher rates than easy access accounts but in recent times the gap has closed; essentially this means that you may not need to trade flexibility for returns.

Bond or term accounts

These types of accounts usually offer a fixed rate and in return require you to commit your savings for a set time period or ‘term’. At the end of the term you get your capital back plus interest or alternatively, you can take a fixed monthly income. The length of the term can range from six months to five years, and during this period you will not usually be able to access your money, meaning that it’s locked away. Most bond or term accounts do not permit you to add to the initial deposit you make and may have high minimum deposit amounts - £10,000 is not uncommon.

Regular saver accounts

These accounts require you to save on a monthly basis for a set time period e.g. 12 months. They are useful for occasions where you are saving for a specific purpose, perhaps a car, holiday or wedding, although you must commit to depositing money every month and may be required to set the monthly deposit amount at the time you open the account. Usually there’s an upper limit on the amount you can deposit each month, too – often £250 or £300 – although the minimum deposit amount may be quite low. In return for their lack of flexibility these accounts tend to offer higher interest rates than easy access accounts, notice accounts and bonds and the interest rate itself tends to be fixed rather than variable.

Guaranteed equity bonds

Guaranteed equity bonds are linked to a stock market index, usually the FTSE 100 or FTSE All share, and run for a fixed term. They are complex products that tend to appeal to investors who want exposure to the stock market but without the full risk that it involves. While they guarantee to pay a minimum return, which may be all the capital you invested at the outset or a proportion of it, the return you get will depend on what’s happened to the stock market over the fixed term as well as the calculations used to determine what the return should be.

Individual Savings Accounts (ISAs)

For information on ISAs please read our dedicated ISA guide.

What other options are available?

Other savings options include:

Affinity accounts

These accounts are typically linked to charities or other causes – such as a football or rugby team. A proportion of the interest earned on your savings will be allocated to the cause to which the account is affiliated.

Over 50's accounts

These accounts are designed for the over 50s age group only and may have additional features such as bonus interest for low level of withdrawals.

Offshore accounts

Offered by high street banks, building societies and private banks, offshore accounts are usually based in the Channel Islands and the Isle of Man. Unlike standard savings accounts which pay interest net of tax, the attraction of offshore accounts is that they pay interest gross. Although any income from savings must still be declared, meaning you will still pay tax, the deferral of tax in this way can boost your overall return as the amount that would normally be automatically deducted stays in your account longer.

What are National Savings & Investments?

National Savings & Investments (NS & I) is a Government-backed initiative that offers a range of savings products including fixed rate deals, tax-free savings and inflation-proof accounts. These products are popular with savers because of the firm’s Government backing, meaning they are perceived to be the safest place to save your money.

Remember!  NS & I accounts may not always offer competitive interest rates, therefore it’s important to compare the deals available with accounts offered by other providers.

Remember!  Money deposited with banks and building societies is covered by the Financial Services Compensation Scheme (with the exception of offshore accounts). This means that the first £85,000 per person per firm for deposits and the first £50,000 per person per firm for investments is fully protected.

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