Other things to consider when opening a savings account

In this, the final part of our guide, we look at how interest is paid, restrictions and terms, and what regulations are in place to protect your savings and ensure you are treated fairly.

What interest rates are available?

When you open a savings account the interest rate will either be fixed or variable. Fixed interest rates are guaranteed not to change for a set time period, whereas variable interest rates fluctuate, which means they can go down as well as up.

How is interest displayed?

Interest on savings accounts is displayed in two ways:

Gross Interest

Gross interest is the rate of interest, displayed as a percentage, before tax is deducted.

Annual Equivalent Rate (AER)

The AER shows what the notional rate of interest would be if the interest was compounded (paid on the accrued interest as well as the principal) and paid annually rather than monthly or quarterly.

How is interest paid?

Depending on the account, interest may be payable daily, monthly, quarterly or annually. Accounts that pay interest on an annual basis may offer more competitive rates however having your interest paid more frequently can boost your overall return as it allows you to earn interest on your interest as well as your capital.

Unless you have an offshore account, any interest you receive will be paid net of tax (i.e.after tax has been deducted). Most savings income is automatically taxed at 20%.

What else do I need to look out for?

When you compare savings accounts you also need to consider:

Minimum/maximum deposits

Some savings accounts require a minimum deposit (or investment amount). Accounts with higher minimum deposits tend to be fixed rate bonds, guaranteed equity bonds and offshore accounts – in fact for these accounts a minimum deposit of £10,000 is not uncommon.

There may also be a limit as to how much you can invest in the account, particularly if the account offers an attractive rate of interest. By setting a maximum investment amount providers can control how much money they pay out in interest.

Notice periods

Some savings accounts e.g. notice accounts require you to give advance notice of any withdrawals you plan to make. Depending on the account this will typically be 30, 60, 90 or 120 days; if you do need the money sooner then you’ll be subjected to a penalty.

Withdrawal restrictions

Some accounts also place limits on the amount or frequency of withdrawals, or have other restrictive terms – for example you may forfeit the interest you’ve earned in the months that you make a withdrawal.

Short term bonuses

Some providers offer rates that include short term bonuses i.e. a fixed period with a higher interest rate, after which the interest rate reduces. To prevent you from transferring your money to another account once the bonus period has ended you may be tied into the account for a set period of time, or subjected to a penalty if you close the account within a set period of the bonus ending.

What regulation is in place to protect my savings?

Financial Services Compensation Scheme (FSCS)

In the UK savings providers are authorised and regulated by the Financial Services Authority^† (FSA) and money that you deposit with them is protected by the Financial Services Compensation Scheme^† (FSCS).

The FSCS is a compensation fund that offers protection in the event of an authorised firm becoming insolvent or ceasing trading. Under the terms of the compensation fund the first £50,000 of an individual’s savings is fully protected and where the account is in joint names this increases to £100,000. The exception is for offshore accounts, which are not covered by the scheme.

Remember! The individual and joint limits apply per provider and not per account. Therefore if you have a large amount of savings with the same provider then you will only be protected up to the limit of £50,000 for individual accounts and £100,000 for joint accounts. For this reason it makes sense to spread your money between different financial institutions.

Remember! If you do choose to spread your money between different institutions then you need to be aware that some institutions have the same parent company, for example Halifax and Bank of Scotland (HBOS) are part of the Lloyds TSB group. In these situations only £50,000 would be protected by the FSCS.

Banking Code

The Banking Code is a code of conduct relating to the way financial institutions treat their customers. Most banks and building societies are part of the scheme.

The code requires institutions to inform their customers when they change the interest rates on the accounts in their portfolio however this must only be done on an individual basis when the margin between the savings rate and the Bank base rate widens by more than 0.5% in any 12 month period.

Institutions most also notify customers on an individual basis if the margin widens by 0.26 points or more following a single Bank rate increase or decrease.

Where the changes do not meet these requirements notification will be via notices in branches, newspapers or on the provider’s website.

Remember! Providers are not obliged to inform customers of new accounts that pay higher rates of interest. Always compare your account with the rest of the market to see if you could gain by transferring your funds.

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