Finding the best savings account Savings account problems solved
How often should I review my savings account?
It's a good idea to review the interest rate on your savings every six months. If you have a regular savings account or an instant access account with a bonus, the initial high interest rate will often last for just one year. You may well need to switch after this point.
Make a note of how long any bonus rate on your savings lasts for, and then switch when this expires if the rate is no longer competitive.
If your account is offering you a poor return, consult the Which? Best Rate savings accounts review and find a more competitive deal.
What difference does it make to my savings account when my interest is paid?
The more often interest is paid or credited, the higher the return on your money will be. This is because interest credited to a savings account itself earns interest – called 'compound interest'.
With some accounts you can choose how often to have interest paid - monthly, quarterly or yearly. Usually, the AER is the same whichever option you choose, but the advertised gross rate (which does not take into account compounding) will be lower the more frequently interest is paid or credited.
For example: a savings account might offer an AER of 5%, allowing you to choose to have interest credited monthly or yearly. The advertised gross rate for the yearly option would be 5%, but the advertised gross rate for the monthly option would be 4.89%.
Despite the lower advertised gross rate, the monthly option in fact offers you the same return (as shown by the AER), because you get the benefit of interest being paid earlier.
What's an AER, and how will it affect the return I get on my savings?
AER stands for annual equivalent rate. It allows you to compare the interest rates offered on different accounts by reflecting not only the headline interest rate an account is advertising, but also how often interest will be paid to customers. Generally speaking, the higher the AER on offer, the greater the return on your savings.
For example: imagine two accounts which are offering interest rates of 5% a year. One credits all the interest at the end of the year, but the other pays you 2.5% every six months. If you invested £5,000 in each, by the end of the year the balance of the first account would have grown to £5,250 and the second to £5,253. This is because the interest credited after six months in the first account has itself earned interest during the second six months, increasing the overall return. The AERs for these two accounts would be 5% and 5.06%, respectively.
All adverts for savings accounts should quote the AER as it allows you to compare the return on different accounts, regardless of how often interest is paid.
What if the bank or building society I'm saving with goes bust? Will I get my money back?
Almost all banks operating in the UK, including all the high-street banks, are covered by the Financial Services Compensation Scheme (FSCS). This guarantees £85,000 (from 31 December 2010) of savings per individual, per institution - but it's important to be aware of which banking brands are linked, in order to ensure you don't over-invest with a single institution.
People with joint accounts could each claim £85,000 in the event their bank went bust - so, effectively, you get £170,000 of protection overall.
You can find more detailed information about savings protection in the Are my savings safe? advice guide.
My interest rate has just been cut – why does this happen?
The interest rates on savings tend to move in line with interest rates in the economy as a whole. So, if the Bank of England cuts its base rate, the interest rate on your savings will probably fall, too. In the current economic climate, many savings accounts have been hit by the historically low interest rates set by the Bank of England.
But sometimes banks and building societies cut rates by much more than the fall in the base rate, or cut their rates when the base rate has not changed at all. This is because they also set interest rates on particular accounts to attract new customers, cutting them once they have acquired enough new business.
For this reason, you're likely to find the return on your savings diminishes over time if you don't regularly switch to a new Best Rate savings deal.
Will I be told if the rate on my savings account is cut?
If you have an internet, postal or phone account, your bank or building society must inform you of any cut in your interest rate. This information may come in the form of a letter or an email.
If you have a branch-based account, the provider can choose to tell you personally within 30 days of the change. However, it can also opt for a simpler procedure and just advertise the rate change in the branch and in selected newspapers. This means you might not be aware of a rate change, especially if you rarely visit a branch.
But even with a branch-based account, the bank or building society must notify you personally if, within any 12-month period, your interest rate has fallen by 0.5% or more relative to the Bank of England base rate, as long as your account has got at least £250 in it. You will then be given the option to close the account without giving notice and without penalty.
My cash Isa has a poor interest rate and I want to switch accounts – what are the rules?
You can move all or part of any previous years' cash Isas to a new provider at any time, without eating into your current year's allowance. However, you must be careful to do this in accordance with the Isa transfer rules or your savings could end up losing their tax-free benefits.
For all the information you need on moving money from an old into a new cash Isa, read our guide.
I don't want to bank online, but your best rates are usually internet based. Where can I get a better rate?
It's true that the best interest rates are usually offered by internet savings accounts. However, telephone-operated or postal accounts often have rates that are nearly as good.
If you don't need ready access to your money, you could also consider a notice savings account or a fixed-rate bond. In return for tying up your money, it's likely you'll get a higher rate of interest.