Savings accounts: Features explained
A Best Buy account can make a big difference to your savings
In addition to offering Individual Savings Accounts (Isas) allowing tax-free cash savings of up to £3,600 each year, UK banks and building societies offer a selection of standard, taxable savings accounts. These benefit from much more flexible controls and do not impose an upper limit on the amount you can pay in in any one tax year.
Accounts can be opened and managed by post, telephone or internet and range from 'instant access' style accounts where no notice needs to be given in order to withdraw money to those governed by a 90-day notice period or ones which fix you in for a specific 'term'.
Interest rates
Most of these accounts pay variable interest that goes up and down broadly in line with the Bank of England base rate. Some link the interest rate directly into the Bank rate, while others use a different benchmark. Interest is often tiered, with higher rates paid on larger account balances.
Other accounts offer a fixed rate of interest over a set period of time. Sometimes the rate will be stepped, paying one rate in the first year then a higher one the next, and so on.
So long as your account has more than £250 in it, regardless of who you save with, the Banking Code means your bank or building society has to keep you informed about any fluctuations in your interest rate.
As a result, they must now personally inform you if, during the last 12 months, the interest rate on your account has fallen by 0.5% points or more, relative to the Bank of England's base rate. Once a year it must also send you a summary of all its accounts and current interest rates.
How it is paid: With most accounts, interest is automatically added to your balance. Some accounts however will pay interest on a regular monthly or quarterly basis.
Access to your money
Traditionally, accounts were branch based however they now extend to post, phone or internet too, or a combination of the three - ultimately making it easier to get to your money.
Most banks and building societies offer at least one 'easy-access account'. This lets you withdraw your money at any time without penalty. But there are usually general restrictions, such as a daily limit on withdrawals through cash machines. A few have other restrictions too, such as a limit on the number of withdrawals you can make each year.
With 'notice accounts', you have to tell the bank or building society in advance that you will be wanting to make a withdrawal. Notice periods of 30, 60 or 90 days are common. Most let you withdraw money without giving the required notice and instead you lose an equivalent amount of interest.
'Term accounts' require you to tie up your money for a fixed period of time (the 'term'). Often there is no access to your money before the term is up.
Getting a higher return
Internet accounts tend to offer the highest interest rates. But phone and postal accounts often have returns that are nearly as good. Branch-based accounts tend to offer the lowest interest.
Don't expect to always earn more from a notice account or term account than from an easy-access account.
Many accounts offer tiered rates, so the larger the sum you can invest, the higher the return you can get. Some accounts have a high minimum investment and tend to pay a higher rate of interest than accounts with a lower minimum.