What you need to know when choosing a savings account

Whether you’re just starting to think about where to put your savings, or have been saving for a while, it’s important to make sure you have the account that would work hardest to meet your savings goals.

You want a simple way to grow your hard-earned money and keep it safe, but with lots of options to choose from, it may be confusing to know which one (or ones) would most suit your needs.

Here, we take a look at some of the different savings accounts available in a bit more detail.

How do you know what’s right for you?

The type of savings account you need depends on your own particular situation and savings goals. You need to decide:

• what you’re saving for;
• how long you want to save for;
• how much you can afford to put away;
• how frequently you can save; and
• whether you need regular access to your money.

You should also consider how you want to manage your account – do you prefer the convenience of an online account, like to manage your account through the post, or enjoy visiting a branch for that personal touch?

Savings accounts

Every savings provider will have their own terms and conditions for their range of accounts, so make sure you read all of the details closely before you place your money with them. But in general, here are details of the usual types of accounts you could open.

• Easy access
  
  A simple and straightforward way to save, allowing quick access to your money if you need it for an emergency.
  
  In exchange for this flexible access, you usually get a lower rate of interest than with other accounts, with the rate being variable, meaning that this could change over time.
  
  Easy access accounts are ideal for short-term savings goals or a place to hold your ‘rainy day’ fund if you ever need to get hold of your money to pay an unexpected bill.
  
  
• Fixed rate bond
  
  These accounts tend to offer a higher rate of interest than an Easy access account or Notice account as you won’t have access to your savings over a fixed rate period.
  
  Many fixed rate bond providers don’t allow you access to your money until the end of the fixed rate period, but you may find a few providers that do, however these withdrawals may come at a cost, whether that’s a one-off charge or a loss of interest.
  
  Fixed rate bonds could be suitable for your medium to long-term savings goals - as you’ll know in advance exactly how much interest you could earn over the fixed rate period.
  
  
• Notice accounts
  
  Notice accounts are similar to an easy access account in that you can add to your savings when you like (up to the maximum account balance), however you will have to give a specified amount of notice before you can withdraw your money.
  
  The more notice you are willing to give, the higher rate of interest you could earn.
  
  Notice accounts could be a good way of looking after your short to medium-term savings needs, as they pay a higher rate of interest on cash you don’t need immediate access to, giving you a bit more flexibility than a fixed rate bond.
  
  
• Regular savings
  
  With a regular saver account, you agree to save a set amount each month, often for an agreed amount of time. In return, you may receive a higher rate of interest than most other types of accounts.
  
  Regular saver accounts could be ideal if you’ve got a particular savings goal in mind – maybe you’re saving for a deposit on your dream home or for an unforgettable trip abroad and want to earn a higher interest rate whilst still having access to your money if you need it quickly.
  
  You’ll need to bear in mind that they often come with strict terms and conditions, and missing a payment or accessing your money early could result in loss of interest or other charges.

If you’d like to see how our accounts could meet your needs, you can view our latest range here.

ISAs

An Individual Savings Account (ISA) is an account where you don’t pay tax on any interest you earn, and may be the right choice if you are lucky enough to be earning interest in other accounts that’s higher than your Personal Savings Allowance.

Personal Savings Allowance

Basic rate taxpayers could earn up to £1,000 in interest without having to pay tax on that interest from any account where they earn interest, including savings accounts. For higher rate taxpayers the allowance covers up to £500 of interest earned, but those classed as additional rate taxpayers aren’t entitled to a Personal Savings Allowance.

How ISAs work

Each year the government sets the maximum amount of money you can pay into ISAs in the tax year. The allowance for the 2022/23 tax year is £20,000.

You could save your allowance in a single ISA, or some providers allow you to split it between different types. For adults, you could choose to save in cash, Stocks and Shares, Lifetime, and Innovative Finance ISAs.

Importantly, unless you have a flexible ISA, any withdrawals that you make can’t be paid back into your account without it counting towards your annual tax free allowance. So you should be sure to check your terms and conditions before making a withdrawal.

You can also save in a Junior ISA on behalf of your child until they turn 18, but this has its own separate annual allowance.

Now you know how much you can save in ISAs, here’s some more detail on each type of ISA to help you decide if they’re right for you.

• Cash ISAs
  
  Cash ISAs are the most popular. They’re accounts that allow you to save money without paying tax on the interest you earn, and just like ordinary savings accounts, you’ll find easy access, notice and fixed rate cash ISAs which operate in pretty much the same way as the non-ISA accounts discussed above.
  
  
• Stocks and Shares ISA
  
  This type of ISA is more complicated than a basic cash ISA, so you may want to speak with a qualified financial adviser before deciding to open one.
  
  You can visit unbiased.co.uk to find one in your local area and they’ll give help and advice, usually for a fee, taking into account how comfortable you are with risk. And that’s the thing that sets this type of ISA apart from the rest - the element of risk.
  
  You have the potential to make much bigger returns, but because you’re investing in the stock market, the value of your savings can go down as well as up.
  
  
• Lifetime ISA
  
  You can open a Lifetime ISA (LISA) if you’re aged between 18 and 39 years old, and could be useful for both aspiring home-owners and those planning ahead for their retirement. As with all other ISAs, you don’t pay tax on the interest you earn, but that’s where most of the similarities end.
  
  You can pay up to £4,000 of your annual ISA allowance into a LISA each tax year and, as an extra incentive, the government will give you a 25% bonus on your savings, paid monthly, up to a maximum of £1,000 each year.
  
  You can continue paying into your LISA right up to the age of 50, at which point you’ll then have to wait until your 60th birthday before you can access it – unless you’re using the money to buy your first home.
  
  Choose to withdraw before you turn 60 for any other reason and you’ll be hit with a hefty charge on the amount you withdraw. The government website has full details on how withdrawing early can affect your account.
  
  
• Innovative Finance ISA
  
  Innovative Finance ISAs work differently to the other ISA types. Rather than depositing cash into an account, you lend money to businesses and individuals who’re looking to gain access to finance. In return, they pay you a rate of interest based on the amount of time you’re prepared to leave your money with them.
  
  The transactions all happen through a peer-to-peer lending platform and, as there’s no bank or building society involved in the process, you may be able to benefit from lower fees and higher interest.
  
  As with any form of investment, the value of your savings can go down as well as up and, as they work like a loan, Innovative Finance ISAs can be a more risky option.
  
  The business or individual who’s borrowing money from you could default on their repayments and whilst many platforms will have contingency funds set aside should this happen, unlike most normal UK savings accounts, the Financial Service Compensation Scheme won’t step in, meaning you could end up losing your savings.
  
  

• Junior ISAs
  
  A Junior ISA is a child savings account that provides a long term plan for children aged under 18. They’re an ideal way to help ensure your child’s financial future gets off to a good start - getting them ready to face adult life with a savings safety net.
  
  As with the adult ISAs, there is an annual ISA allowance (£9,000 for the 2022/23 tax year) and you get to choose how to split this. You could put all £9,000 in a Junior cash ISA, all the allowance in a Junior Stocks and Shares ISA, or, if you’d rather not put all of your nest eggs in one basket, split your allowance between the two. Just as long as you stay within the annual allowance.
  
  Like the adult versions though, if you pick the Stocks and Shares route, you need to remember that you’re investing in the stock market and the value of your savings can go down as well as up.

Find out more about our range of cash ISAs to see if they meet your needs.

How is your money protected?

All eligible deposits in UK savings accounts (including cash ISAs) are protected up to a total of £85,000 by the Financial Services Compensation Scheme (FSCS), the UK’s deposit protection scheme. Any savings held above this limit are unlikely to be covered.

You should always check if your provider shares its FSCS cover with another institution, as several providers could be owned by the same bank, meaning that even if you spread your savings across more than one provider you could only be protected for a total of £85,000, not £85,000 per provider.

Visit fscs.org.uk for more information on the Financial Services Compensation Scheme.

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