A Beginners’ Guide to Savings Accounts

A Beginners’ Guide to Savings Accounts

Savings accounts are a wonderful way of putting money aside for the future, and are designed specifically for that purpose.

Many people use savings account as a way of helping themselves afford a house or holiday in the future, while many treat the money in these accounts as ‘emergency funds’.

What are the different types of savings accounts?

There are numerous types of savings accounts, and it’s important to identify which is the most suitable for you.

Easy-access accounts

  • Add to or withdraw from your savings whenever you wish
  • Interest rates may be low, introductory rates may drop

As the name suggests, easy-access accounts enable the saver to access their money whenever they decide, unlike other accounts which require notice periods.

This makes it considerably easier to add or withdraw money as you please, which means it’s a very effective means of saving money for emergencies.

Interest rates on these accounts are usually variable and fluctuate up and down. It can be a good idea to consider switching savings accounts after the introductory period in order find a better interest rate.

Notice accounts

  • Possibility of more attractive interest rates
  • Restricted access to funds

If you don’t need to access your savings account often, or in an emergency, it might be worth considering a notice account.

These accounts require notice before access is given, usually 30, 60, 90 or 120 days. Generally, the longer the notice period requires, the higher the interest rate.

The interest rate available for notice accounts is usually variable, but tends to be higher than the rate offered with easy-access accounts.

Fixed bond or term accounts

  • A degree of certainty over interest rates and returns
  • No access to your funds during the term

Fixed bond or term accounts have a fixed rate of interest for the entirety of their length. However, this rate tends to be higher than that offered on easy-access or notice accounts.

The downside of this form of account is that you have to commit to a set period of time, usually between one and five years.

Usually, the deposit required to open one of these accounts is fairly high and you may not be able to add to this during the agreed term.

Before agreeing to this type of account, you should think about whether you can afford to leave a large sum of money untouched. Also, bear in mind that you may lose out as interest rates rise in the meantime.

Regular-saver accounts

  • Interest rates can be attractive
  • Inflexibility with regard to amount saved and, perhaps, access to funds

Regular-saver accounts tend to have appealing interest rates in order to draw in customers and these rates are usually fixed.

This type of account requires a monthly deposit, the amount of which will need to be confirmed when the account is opened.

Usually there’s an upper limit on the amount you can deposit each month – perhaps £250 or £300 – although the minimum deposit amount may be quite low.

The terms and conditions of a regular-saver account can be fairly strict. You may need to give notice before withdrawing money, and there may be penalties if you miss a payment.

Guaranteed equity bonds

These tend to appeal to those who wish to enter the stock market, while avoiding the risk factor as they guarantee to pay a minimum return. They are complex and may not end up generating more money than a standard savings account.

Individual Savings Accounts (ISAs)

The only real difference between an ISA and a standard savings account is that the interest earned over the saving period is tax-free.

What other options are available?

If none of those accounts are suitable for you then you may want to consider the following:

Peer-to-peer savings accounts

  • Possibility of attractive returns
  • Fewer guarantees to protect returns or capital

Peer-to-peer accounts offer the chance to lend or invest in business without using banks or building societies. Usually, the interest rates are good, but can come with risks as borrowers may not be able to repay and you could lose money.

Peer-to-peer lending websites aren’t part of the Financial Services Compensation Scheme, so you could lose money if the company you’re using goes bust.

Offshore accounts

  • May offer tax advantages
  • Not protected by the Financial Services Compensation Scheme

These are offered by a number of banks and building societies, and would mean you do not need to pay interest net of tax. The attraction of offshore deals is that they pay interest gross.

Any income from this option will still need to be declared and all necessary taxes paid, but you can save more than with a standard account because the amount that would be deducted automatically in the UK stays part of your savings.

Affinity and charity accounts

This type of account is usually linked to charities or other causes, meaning that a proportion of the interest earned on the money will go to your chosen cause.

Over 50s accounts

These are specifically designed towards people aged over 50 years old, and may have extra features such as bonus interest for low withdrawal levels.

National Savings and Investments?

  • Government backing offers added security
  • Returns may not be the most attractive

National Savings and Investments (NS&I) is an initiative backed by the government which offers products such as Premium Bonds and inflation-proof accounts.

They are popular options because they are considered to be the safest place to save money due to the government backing.

How is interest paid?

The way in which interest is paid will depend entirely on the product and may be paid daily, monthly, quarterly or annually.

While the most competitive rate may come from annual interest, more regular payments could end up earning more through compound interest.

The first £1,000 earned through interest is tax-free if you pay tax at the basic rate. Higher-rate taxpayers get £500 free and additional-rate taxpayers have no allowance.

How is interest displayed?

Interest is displayed in the following two ways:

  • Gross interest

Gross interest is the rate of interest – displayed as a percentage – before tax is deducted.

  • Annual Equivalent Rate (AER)

AER can show a more accurate rate than gross interest, as it takes into account how much you would earn on your savings if you had them in an account for a whole year.

What regulation is in place to protect my savings?

For most people, one of the most important considerations when looking into savings accounts is whether their money is safe. The following can help protect your money:

Financial Services Compensation Scheme (FSCS)

Companies that provide savings are regulated by the Financial Conduct Authority and the money that you deposit will be protected by the Financial Services Compensation Scheme (FSCS).

This is a compensation fund that protects your finances if the business you save with ceases trading, and means that under the compensation fund you will be protected for:

  • The first £85,000 of an individual’s savings
  • The first £170,000 of a joint-name account

You will not be protected if you have an offshore account, investments or peer-to-peer savings.

Banking Code

The Banking Codes is a code of conduct dictating how financial institutions must treat their customers. It says that you must be notified if your interest rate decreases.

No matter what type of account you have, you must receive personal notification. However, you must have at least £250 in it and the interest rate must have dropped by 0.5 per cent or more over 12 months.

It is then up to you whether you wish to close the account, which you can do without giving notice or paying a fee.

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