A savings account does exactly what it says on the tin. It's an account where you can save money and earn interest.
What's sometimes confusing, is how many different types there are. And ways to save. Most people who open a savings account want to earn the most interest possible on their savings - whether thats on a short or long-term basis. Find out more about choosing the right account for your savings goals below.
There are a few core types of savings accounts you might want to compare, these are:
The main differences between these types of savings accounts are how easy it is to withdraw money from the account and how much interest you'll earn. Generally, you'll get better interest rates on accounts it's harder to take money out of - where there are limits on withdrawals, for example.
Some accounts can be opened with as little as £1, while others require larger sums as an initial deposit. Some savings accounts have minimum ammounts you need to put into them each month - so make sure you've read the terms carefully and that you're able to afford any monthly amounts.
Your personal savings allowance means that you don't pay tax on the first £500 - £1,000 of interest earned - for those on a lower rate tax band (20%) this is £1,000, for those on the higher rate (40%) this is £500.
ISAs also offer tax-free interest on savings, you can choose fixed rate ISAs (generally higher level of interest but there may be stipluations around withdrawals) or easy access - which tend to have lower interest rates, but your money is readily available should you need it.
If you're looking to get the most interest on your savings, but on a short-term basis, you'll probably want to look at easy access acounts. You can usually withdraw money any time, though sometimes there's a limit on how many withdrawls you can make in a year.
If you don't need easy access to your cash, or you're saving for something a little further down the line, then a fixed rate or notice account might work better for your money.
These generally have higher interest rates, but will have limits on withdrawals. You might not be able to withdraw any money to start with at all. And if you do want to, you usually need to give notice - usually between 30 and 120 days.
Five tips to get more from your money
Basic rate taxpayers get the first £1,000 of savings interest tax free, so you could put away up to £62,500 a year at 2% AER before paying any tax. Though the tax benefits will depend on your personal circumstances
Locking away your money can mean better rates. Worth considering if you know you don’t need cash for several years
Banks like knowing where the money is - a notice account might offer competitive rates
Commit to putting money aside each month for some of the better rates on the market for smaller sums of money
Interest rates don’t stay the same forever - you might find better rates by moving
Compound interest simply means interest is paid on interest. For savings and investments you can maximise gains by leaving interest in the account, and for loans and other debt, high interest and minimum payments can quickly increase the amount owed.
AER stands for 'annual equivalent rate' and shows the percentage interest you’d get if you put your money in an account and left it there for a year.
It lets you compare the interest rate of one account to another.
You get £85,000-worth of Financial Services Compensation Scheme (FSCS) protection per institution you save with, as long as they’re UK regulated.
So if you’ve got more than £85,000 in savings you might want to split your money between several financial institutions to be on the safe side.
As many as you like – although you might be limited to a certain number with one provider. Handy if you want to keep certain funds separate.
You might want one for your wedding savings and one for your home, for instance.
Between three and six months' worth of salary is a good guideline, but don’t lock away more than you can afford.
Savings accounts aren’t a credit product and they won’t affect your credit score or your ability to borrow.
Only credit products like current accounts, credit cards and loans appear on your credit record.