Savings accounts explained
The savings market is flooded with many different types of accounts, which can make it difficult to decide which deal is best for you.
Several factors will affect which kind of savings account suits you, including whether or not you will pay tax on the interest, how likely you are to need access to your money, and how long you are prepared to lock it away for.
Find out more: How to find the best savings account - a step-by-step guide
If you exceed your annual personal savings allowance, you might have to pay tax on interest earned from your savings in line with your usual rate - so you stand to lose 20% or 40% of your return.
However, cash Isas (individual savings accounts) generate interest tax-free.
There’s a limit to how much you can put in a cash Isa each year, currently set at £20,000 for the 2020-21 tax year, which can be made up of cash, stocks and shares, or a combination of both.
This is unchanged from 2019-20.
Once you’ve used this up, you will need to opt for another type of account if you want to continue saving.
Which? Money Compare table: Search hundreds of savings accounts and cash Isas.
How to find the best cash Isa
Since April 2016, all savings interest has been paid without any tax deducted.
You can compare rates across the entire savings market - there’s no need to hold your money in an Isa if a standard account offers you a higher rate.
However, for most people, Isas are still a sensible home for your savings long-term.
Find out more: Are Isas still worthwhile? - our experts weigh up the benefits
Easy-access savings accounts do what they say on the tin: they allow you to withdraw your money quickly and easily.
Some easy-access accounts come with a plastic card that can be used to take out money from cash machines, some offer over-the-counter withdrawals, and many allow you to transfer money out of your account online, penalty-free.
Saving in an easy-access account makes sense if you think you might need to withdraw some of the cash you’ve put aside. ‘Emergency savings’ should be kept in an easy-access account so you won’t struggle to get at them in a crisis.
Which? Money Compare table: Search hundreds of cash Isas.
Easy-access pitfalls to watch out for
It’s worth remembering that some easy-access accounts offer more immediate withdrawals than others. If you’re with an online-only bank or are operating your account by phone, it’s possible that any withdrawals or transfers you make might take a few days to go through.
Easy-access accounts may also limit the number of withdrawals you can make each year without losing interest, so remember to check.
Although many easy-access accounts offer customers an introductory ‘bonus’ interest rate that might be fixed for 12 months, these accounts are typically variable-rate deals. This means that, after any introductory bonus you get expires, the rate payable on your cash may drop.
It’s important to keep a close eye on the return your savings are earning, and switch to a new Best Rate savings account if necessary.
Notice savings accounts work in a different way to easy-access deals.
Instead of having quick access to your money when it suits you, saving in a notice account means you’ll have to tell your provider in advance that you want to make a withdrawal.
Some notice accounts demand that you let them know you intend to withdraw money 30, 60 or 90 days ahead - so these accounts are unlikely to suit you if you may need to get at your savings unexpectedly.
If you do make an emergency withdrawal from a notice savings account, you’re likely to lose some interest.
Notice rates aren't as good as they used to be
In the past, notice accounts have offered higher interest rates than instant-access deals, but this is no longer always the case. Therefore, before opening a notice account, it’s worth checking to see whether you could get the same return on your money without restricting your access to it.
Again, notice accounts are likely to come with variable interest rates. This means it’s important to keep an eye on your return and switch your savings account if you are no longer getting a competitive deal.
Which? Money Compare table: Compare notice account deals.
Regular savings accounts or 'regular savers' require customers to deposit money each month, without fail - so they are ideal for savers who are just starting out, or who wish to drip feed cash into their account in a disciplined way.
The interest rate on offer can be fixed or variable.
These accounts typically last for one year and restrict you from investing more than a certain sum (e.g. maximum £250 per month), preventing you from placing extra cash in your account as and when it suits you.
Some providers also limit the number of withdrawals you can make each year, so don't use these for emergency savings.
Check whether you need to open a current account with the provider first, as many Best Rate regular savers are available to existing customers only.
Which? Money Compare table: Compare regular savings account deals.
Regular saver returns aren't always what they appear
Most regular savers offer impressive-looking rates, as high as 5% in some cases, but it’s important to remember that your money will be building up gradually, so the overall return might be more modest than you expect.
For example, if you saved £1,200 over a year in regular monthly instalments of £100, you wouldn't be paid the headline rate of interest on the entire sum - because only the first month's payment would be in the account for the full year.
In contrast, if you opened a standard savings account that allowed you to deposit £1,200 in one go, you could earn the headline rate on the lump sum from day one.
This is why, if you have a large amount of money to put by, a regular saver might not be the best choice for you, even though the advertised interest rate might seem too good to resist. Opting for an account with an artificially lower rate that allows you to invest large sums all at once might make more sense.
Fixed-rate bonds are savings accounts that offer a fixed interest rate on your cash for a set period of time. While they often come with the highest interest rates, opening one will mean giving up access to your money during the term of the bond.
Fixed-rate bonds can extend over one year, two years - even three, four or five years. Generally, the longer you’re prepared to lock your cash away for, the higher your return will be.
While it may be possible to get your money out of a fixed-rate bond in an emergency, it’s likely you’d stand to pay a hefty interest penalty for doing so. Therefore, tying up your cash in a fixed-rate bond is only a good idea if you’re confident you won’t need to get at it.
Which? Money Compare table: Compare fixed-rate bond deals
Investing in a fixed-rate bond is one way to protect your savings return in a era of falling rates, but be aware the opposite is also true: if you lock your money up in a fixed-rate bond just before rates rise, your cash won’t benefit from the increase.
Many fixed-rate bonds require large initial deposits - so if you’re a beginner saver, you may struggle to find a suitable deal. In addition, some fixed-rate bonds allow you to invest just one lump sum when you open your account, and do not permit additional deposits during the term of the bond.
Therefore, these deals are often unsuitable for those who may want to add more to their savings pot over time.
Tax-free Help to Save accounts
New 'Help-to-Save' accounts were launched by National Savings & Investments (NS&I) in September 2018, offering 3.5 million low-paid workers a tax-free government bonus of up to £1,200 over four years.
The scheme is open to workers receiving universal credit (as long as they have a household income equivalent to at least 16 hours a week at the national living wage - currently £520 a month) and working tax credit.
Individuals can save a maximum of £50 a month and receive a 50% tax-free bonus after two years, worth up to £600. They can then choose to save for another two years, with a further £600 bonus available.
In total, account holders can build a pot of £3,600 over four years, with a £1,200 contribution from the government.
Withdrawals are permitted (excluding the government bonus) but this could affect the amount of bonus received when the account matures. There will be no restrictions on how savings can be used at the end of the term.
Account-holders can continue to save under the scheme even if they cease to be eligible for universal credit or working tax credits later on (and this includes the second two-year period).
Help to Save is meant to encourage working people on low incomes to build up their savings. But, if you have expensive debts to clear, make this the priority – our guide 10 ways to pay off your debts is a useful place to start.
Will banks pay a basic savings rate (BSR)?
The Financial Conduct Authority (FCA) has proposed a basic savings rate (BSR), where firms are banned from paying different interest rates to different customers based on the age of their account.
It has been suggested that the policy could boost total savings by around £300m a year. Key features of the BSR would include:
- All BSR balances have to be on the same rate, regardless of the age, channel of sale, account size, or any other characteristics.
- There would be only one BSR per firm, rather than several for different easy access cash savings products.
- Each firm would be free to choose the level of BSR and vary it over time.
- Firms would still be free to offer introductory rates to new accounts, with no restrictions on the rates offered before they revert to the BSR.
Banks and building societies offering easy-access savings accounts or cash Isas were invited to respond to the FCA’s discussion paper, along with industry and consumer groups, by 25 October 2018.