Savings accounts: FAQs
Keep tabs on the small print to make the most of your tax-free benefits
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, the initial high interest rate will often last for a year but you may well need to switch after this point.
Similarly, if you opt for a savings account that pays an initial bonus, you should make a note of how long the bonus lasts for and then switch when it finishes if the rate is no longer competitive.
If your account is below average, switch to a Best Buy now.
What's the difference between notice and easy-access?
An easy-access account lets you withdraw your money at any time without penalty (although there may be some general restrictions, such as a daily limit on withdrawals through cash machines or the number of withdrawals you can make a year).
Notice accounts require you to tell your bank or building society in advance if you are wanting to make a withdrawal. Notice periods of 30, 60 or 90 days are common.
What does AER mean?
AER stands for annual equivalent rate. It lets you compare interest rates across accounts and reflects not just the amount of interest but also how often it is paid.
Generally speaking, the higher the AER, the greater the return. For example, two accounts are advertising that they pay 5% a year but one credits all the interest at the end of the year and the other pays you 2.5% every six months. If investing £5,000, by the end of the year the first account will 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 return. Therefore the AERs for the two accounts are 5% and 5.06%, respectively.
In the light of the Northern Rock problems are we right to be worried about the £60,000 in our joint savings account?
Almost all banks operating in the UK, including all the high-street banks, are covered by the Financial Services Compensation Scheme (FSCS). If your bank collapsed, the scheme would pay you back the first £50,000 of your savings. This £50,000 figure covers each account holder, not the account itself, which means that as joint account holders you could make separate claims, covering your £60,000 in full.
What difference does it make when my interest is paid?
The more often interest is paid or credited, the higher the effective return. This is because interest credited to an account itself earns interest – called 'compounding'.
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 rate (which does not take into account compounding) will be lower the more frequently interest is paid or credited.
For example, an account has an AER of 5% and you can choose to have interest credited monthly or yearly. The advertised rate for the yearly option is 5% but the advertised rate for the monthly option is 4.89%.
Despite the lower advertised rate, the monthly option offers you the same return (as shown by the AER) because you get the benefit of interest being paid earlier.
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.
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 customers and cut them once they have enough customers.
Will I be told if my rate is cut?
Interest rate fluctuations can be both good and bad for your savings so it pays to keep your eyes peeled
If you have an internet, postal or phone account, your bank or building society must tell you of any cut in your interest rate. This 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 newspapers usually used by that provider. 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 Isa has a poor interest rate and I want to switch – what are the rules?
Isas have a clear advantage over ordinary savings accounts in that the interest you earn is tax-free. Currently you can save £3,600 a year in a cash Isa following the latest increase in April 2008. Our Best Buy cash Isas all pay around 6% interest.
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 go through bank and building society channels to do this otherwise you stand to lose your tax-free benefits. You can also move your current year's Isa to a new provider if you wish as long as you move everything paid in since the beginning of the tax year.
To move your money, simply contact your old and new Isa providers and instruct them to do the transfer for you.
I don't want to bank online, but your best buys are usually internet based. Where can I get a better rate?
You're right, the best interest rates are usually offered by internet accounts. But phone or postal accounts often have rates that are nearly as good. And, if you don't need ready access to your money, you could consider a notice account (branch-based, phone or postal). In return for tying up your money, you should get a higher rate of interest.
I don't work but my partner works full time. Currently our savings are in joint names – is it worth switching more into my name?
Yes, if you don't work your taxable income will be lower than your tax allowances, which means you won't have to pay any tax on savings interest. Interest on savings accounts is usually paid after 20% has been deducted by the provider. Higher rate tax-payers pay 40% interest.
To get your interest paid tax-free, you will need to complete form R85. This is available from banks, building societies, or HM Revenue and Customs’ website.
When do I need to provide proof of identity to open an account?
You shouldn't need proof of identity to switch to a different account with the same provider. But, if you open an account with a new provider, there are strict money laundering rules designed to prevent the recycling of money from drugs, crime, terrorism, and so on.
The bank or building society must check you are who you say you are and that you live where you say you do, so they will ask you to provide separate proofs of identity and address. Official documents are preferred. You may need more proof for phone or internet accounts.
I have seen adverts for savings accounts offering 10-12% interest – is there a catch?
These are typically regular savings accounts and you are required to deposit money into them on a regular basis, usually monthly. There are often catches – you may need to have a current account at the same bank, and the eye-catching interest rates may be for a set period only. To stop you earning too much interest in that time, the banks can also cap the amount you can pay in often around £250 a month.
There are plenty of other regular savings accounts on the market that don't require you to have a current account with the bank, and these may be a good idea if you have a set amount to save each month. Just make sure you know when the high interest rate is due to end.