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Beginners' guide to savings accounts

The basics of savings accounts, plus information on how interest is paid, restrictions, terms and regulations to protect your money and ensure you're treated fairly.

Key points

  • Always shop around and stay vigilant, checking interest rates, notice periods, withdrawal restrictions and introductory offers
  • AER can be a more accurate representation of returns than gross interest
  • Look for the FSCS compensation fund, which can protect an individual's savings
  • The first £1,000 of savings interest earned by basic-rate taxpayers is tax free
  • Making the most of tax-free allowances with Isas can have a variety of long-term advantages

Savings accounts can be a great way of putting away money for a special purchase or as a nest egg for the future.

While normal bank accounts are designed for the transaction of cash on demand, traditonally a savings account is intended to help store money up over a longer period of time.

This can be useful when saving up for something special, like a house deposit or holiday, or as contingency money in the case of an emergency.

Consider paying off any debts that you have before putting money into a savings account, as any interest you accumulate will probably be outweighed by the interest on your debt.

Bear in mind also that lines have become blurred in recent years, with some current accounts offering higher interest rates than dedicated savings options.

But in the longer term try to understand the benefits of compound interest. This is interest paid on interest and by taking a long-term view you may be able to benefit hugely.

What are the different types of savings accounts?

Easy-access accounts

Easy-access accounts

  • Add to or withdraw from your savings whenever you wish
  • Interest rates may be low, introductory rates may drop

As the name suggests, unlike other savings accounts which may require a notice period or fee to access your savings, easy-access accounts (or instant-access accounts) enable the saver to get their hands on their money whenever they wish.

This means you can both add to or withdraw from your savings whenever you need to, so this type of account has traditionally been popular as savers build up an emergency fund. In the event of, say, a boiler breakdown, the cash would be easily available.

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.

Consider whether a current account offers better rates, though, and take care with introductory savings rates - if the rate you open the account with only lasts for a set period of time it will then usually drop to a less favourable rate.

It's worth considering switching savings accounts when the introductory period is up to take advantage of another interest offer.

Notice accounts

Notice accounts

  • Possibility of more attractive interest rates
  • Restricted access to funds

If you don't need emergency access to your savings you may want to consider a notice account.

If you need to take any money out you'll have to give a pre-determined notice period, typically 30, 60, 90 or 120 days.

All accounts vary, but generally speaking the longer the notice period, the higher the rate of interest.

You may also be able to withdraw money before the notice period, something which is likely to incur a financial penalty.

The interest rate on notice accounts is likely to be variable, but is typically higher than with easy-access products.

Fixed bond or term accounts

Term accounts

  • A degree of certainty over interest rates and returns
  • No access to your funds during the term

Fixed bond or term accounts will have a fixed interest rate for the whole term. You may also find that these products have higher interest rates than easy-access or notice-period accounts at the time you open it.

The downside is that you will have to commit your money for a set period of time. This is usually between six months and five years.

The initial deposit required to open the account may be high, and most term accounts don't allow you to add to the initial deposit.

Think about whether you're able to leave a high sum of money untouched for a long time before committing to this type of account, and whether you're willing to accept the risk that interest rates will go up in the term, meaning you may lose out on more attractive deals elsewhere.

Regular-saver accounts

Regular-saver accounts

  • Interest rates can be attractive
  • Inflexibility with regard to amount saved and, perhaps, access to funds

Regular-savings accounts may have attractive interest rates to entice potential customers and rates are often fixed.

They will require you to deposit a certain amount of money each month, something which needs to be determined when you open the account - and which it may not be possible to change afterwards.

Usually there’s an upper limit on the amount you can deposit each month - perhaps £250 or £300 - although the minimum deposit amount may be quite low.

Regular-deposit products can be useful to help save for something in particular, such as a car or wedding, and can stop you from withdrawing cash from the pot.

However, the terms and conditions can be quite strict. You may not be able to access your money for a set period of time, and you're typically required to meet your payments each month or risk being penalised.

Guaranteed equity bonds

Guaranteed equity bonds

  • Appeal to investors who want to dip their toe into the stock market without the high risk factor
  • Complex and will not necessarily outperform a regular savings account

Guaranteed equity bonds are linked to a stock market index, usually the FTSE 100 or FTSE All Share, and run for a fixed term.

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)

Isas allow you to save money without paying tax on your interest.

Essentially there's very little difference between the way an Isa account works and the way a standard savings account works - it just gives you a tax-free 'wrapper' around your investment.

What other options are available?

Peer-to-peer savings accounts

Peer-to-peer savings

  • Possibility of attractive returns
  • Fewer guarantees to protect returns or capital

Peer-to-peer savings accounts enable you to lend money or invest in businesses without involving banks and building societies.

Interest rates may be attractive, but there may be a risk if a borrower defaults on a loan.

Peer-to-peer lending websites aren't part of the Financial Services Compensation Scheme and the Financial Conduct Authority is in the early stages of regulating the industry, so you could lose money if the company you're using goes bust.

However, the service is becoming increasingly established and mainstream and many firms have their own compensation schemes in place.

Offshore accounts

Offshore accounts

  • May offer tax advantages
  • Not protected by the Financial Services Compensation Scheme

Offered by high street banks, building societies and private banks, offshore accounts are often based in the Channel Islands or the Isle of Man. Unlike standard savings accounts which pay interest net of tax, the attraction of offshore deals is that they pay interest gross.

Although any income from savings must still be declared, meaning that you will still pay tax on it, 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 for longer.

It's important to note that offshore accounts are not protected by the Financial Services Compensation Scheme.

Affinity and charity accounts

This type of account is usually linked to charities or other causes, meaning that a proportion of the interest earned on the money will be allocated to the cause with which the product is affiliated.

Over 50s accounts

Designed for over 50s, these types of accounts may have additional features such as bonus interest for low levels of withdrawals. Remember that they may not necessarily be the best option, even if you fall into the target age group - shop around.

What are National Savings and Investments?


  • Government backing offers added security
  • Returns may not be the most attractive

National Savings and Investments (NS&I) is a government-backed initiative that offers a range of products including Premium Bonds, fixed-rate deals, tax-free savings and inflation-proof accounts.

These products are popular with savers because of government backing, meaning that they are perceived to be the safest place to save money.

Note, though, that interest rates may not be the most competitive.

How is interest paid?

This will depend on the product - it may be daily, monthly, quarterly or annually. Annual interest payments may offer more competitive rates, but paying interest more frequently can boost overall return as you can earn compound interest.

The first £1,000 of interest earned in a year by a basic-rate taxpayer comes free of tax. Higher-rate taxpayers receive interest on the first £500 of their savings free of tax, but there is no such annual allowance for additional-rate taxpayers. A piggy bank wearing a pair of sunglasses

How is interest displayed?

Interest 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)

AER can show a more accurate rate than gross interest, as it takes into account how much you would earn on your savings if you had them in an account for a whole year.

What regulation is in place to protect my savings?

Financial Services Compensation Scheme (FSCS)

Savings providers are authorised and regulated by the Financial Conduct Authority in the UK and money that you deposit with them can be 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.

Remember that providers aren't obliged to inform customers of new products that pay higher rates of interest

This means that under the compensation fund you will be protected for:

  • The first £75,000 of an individual's savings
  • The first £150,000 of a joint-name account

You will not be protected if you have an offshore account, investments or peer-to-peer savings.

Also remember that individual and joint limits apply per provider and not per account, so it may make sense to spread your cash between different financial institutions.

Be aware of different institutions with the same parent company. For example, Halifax and Bank of Scotland are part of the Lloyds TSB group. If you placed £65,000 in an individual Halifax account and £30,000 in an individual Bank of Scotland account, it would still only be the first £75,000 that 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.

If you have an internet, postal or phone account, the code requires institutions to notify you by letter or email if your interest rate decreases. Pound coins and a £5 note

If you have a branch-based account, they can either verbally tell you when you come in within 30 days of the change, or they can announce the change in the branch or by newspapers.

Whatever type of account you have, if it has more than £250 in it and the interest rate has dropped by 0.5% or more in a 12-month period in relation to the Bank of England base rate, your bank or building society must inform you personally. It's then up to you whether you wish to close the account, which you can do without giving notice or paying a fee.

Remember that providers aren't obliged to inform customers of new products that pay higher rates of interest, so it's worth shopping around regularly and switching if your deal is no longer the right one.

FCA plans for reform of the savings market

As part of its attempts to reform what it sees as the malfunctioning £700bn savings market, the FCA is looking to improve consumer awareness and boost competition.

Amongst other planned changes it has called for providers to display interest rates more clearly and to make their notifications of interest rate changes and the ending of fixed-rate periods more accessible.

The FCA aims to implement its reforms by December 2016.

By Abbie Laughton-Coles