There’s no downside to saving for the future. Maybe you want to save for a luxury holiday or put down a deposit on your first house. Saving money is the best way you can help your future self.
If you have no idea where to start, you’ve come to the right place. The best tool for saving is a savings account, which is useful for separating extra money from your everyday bank account.
Storing your extra money is a great way to use a savings account, but many people open a savings account to take advantage of interest rates to maximise savings.
A bank pays you for saving with them, and this is the interest rate which is worked out as a percentage.
Earned interest depends on the provider, the type of savings account you choose, and the interest rate you want to take advantage of.
There are thousands of savings accounts, so you must find the correct account to help you maximise your savings. In this guide, you'll learn about the different types of savings accounts, their advantages and how to start earning interest.
What are Savings Accounts?
A savings account is a financial service that allows you to deposit money from your everyday account, so you can earn interest while knowing your money is safe.
Banks, building societies and other financial institutions offer a variety of savings accounts with different interest rates.
Interest rates aren’t the only factor to consider when looking for the most suitable savings account. You should also consider the following:
- Accessibility: find out if you can access the funds in your account whenever necessary. Some providers may limit withdrawals per month or year, so it's a good idea to find this out before applying.
- Management: look into how you can manage the account. Can you access your account online, in person, or via an app? Also, consider how easy it is to manage the money in your savings account.
- Interest rates: vary between providers, so look for the one that suits you and offers more interest on your savings. It's good to check if rates include a short-term bonus rate and how long.
- Penalties and fees: are there any withdrawal charges or fees? Read all the small print, as each account will have different terms and conditions.
- Backed by the Financial Services Compensation Scheme (FSCS): ensure that your savings are protected if any issues occur with your chosen financial institution.
- Account type: as you read on, you'll learn there are different types of savings accounts to help you find the best savings account for your needs.
It's important to know that you may have to start paying tax on interest earned from your savings. For example, the first £1,000 of interest is tax-free is your personal savings allowance. Your income tax band will affect how much tax you pay on the remainder of your earned interest.
People open savings accounts for many reasons. Whatever your reason, you must open a savings account that suits your needs. Let's explore all the different types of savings accounts so you can make a more informed decision for opening your new account.
The Different Types of Savings Accounts Explained
You can earn interest by keeping your money in a savings account. Different banks and credit unions offer many saving accounts with varying interest rates.
There are many types of savings accounts to consider:
- Easy access account: you can deposit and withdraw money from instant access savings accounts whenever needed.
- Notice account: to withdraw any cash from a notice account, you usually need to give notice, which can vary from 30 – 90 days.
- High-yield savings accounts: reward you with a high-interest rate that quickly grows your savings.
- Money market accounts: reward you with high-interest rates, similar to high-yield savings accounts but with a debit card and check-writing privileges.
- Regular savings account: requires you to save up to a set amount each month, which is ideal if you're saving as you go.
- Fixed savings accounts: these accounts have a fixed rate on savings during a fixed term. You put a lump sum into the savings account and leave it to gain the required interest.
- Individual savings accounts (ISAs): help you save money while benefiting from tax advantages.
- Online-only savings accounts: allow you to control and access your savings online anytime.
- Business savings account: a savings account tailored to businesses instead of the average person.
- Under 18s savings account: introduce the habit of saving to your children.
We've dissected each of these bank accounts to help inform your decision and provided more information on each with its advantages and disadvantages.
1. Easy Access Account
If you're looking for a savings account to stash your emergency fund in, an easy-access account, otherwise known as an instant-access savings account, is an excellent option.
You'll have access to these funds whenever needed, especially if you choose an online banking provider. However, withdrawal transfers may not be instant, so checking this out with the account provider is worth checking out.
Advantages:
✔️ Easy to set up and manage.
✔️ Make withdrawals and deposits whenever.
✔️ You only need a little money to open a savings account.
Disadvantages:
❌️ Other savings accounts may offer higher interest rates.
❌️ There may be a limit on withdrawals.
❌️ Providers can reduce interest rates at short notice.
2. Notice Savings Account
If you want to store your cash in the short term, consider opening a notice savings account. You'll need to ask for a withdrawal in advance. The notice period ranges between 30 and 90 days. You may face a penalty charge if you withdraw with insufficient notice.
Advantages:
✔️ Higher interest rates than easy access accounts.
✔️ Promotes regular savings as you can deposit money whenever you want.
✔️ It helps prevent unnecessary impulsive withdrawals.
Disadvantages:
❌️ There may be penalties and fees for no-notice withdrawals.
❌️ Keep an eye out for terms like needing a minimum account balance to make interest on your money.
❌️ An introductory deal with a high-interest rate can expire relatively quickly.
3. High-yield Savings Accounts
The interest you earn with this savings account is known as an annual percentage yield (APY), and the higher the APY rate on a savings account, the faster your money increases.
You can open a high-yield savings account with most banks and credit unions, and the Federal Deposit Insurance Corporation or FSCS usually protects your money in these accounts. This type of account is ideal for anyone looking to save money for a large purchase.
Advantages:
✔️ Higher interest rates than most savings accounts.
✔️ Easy access to funds.
✔️ Savings are insured against bank failure.
Disadvantages:
❌️ Potential fees depend on your provider.
❌️ Delays can occur when making transfers between accounts.
❌️ Interest rates may change.
4. Money Market Accounts
A money market account allows you to earn interest faster than traditional savings accounts. It has the same properties as a high-yield savings account but with added perks. These accounts are not for everyday spending but allow you to access funds when necessary. Interest on money market accounts is compounded daily and paid monthly.
Advantages:
✔️ Competitive APYs.
✔️ Check-writing privileges.
✔️ It may include a debit card.
Disadvantages:
❌️ A high minimum balance may be required to open an account.
❌️ Higher initial deposits.
❌️ Monthly withdrawal limits.
5. Regular Savings Account
A regular savings account is a great way to save while you go, as this account requires you to save up to a set amount each month. So, if you have a goal for the amount you'd like to save, this account is ideal for setting a monthly plan for your savings to ensure you achieve your goal.
Advantages:
✔️ FSCS covers savings if any issues occur with your financial institution.
✔️ Access your savings accounts via 24-hour online access to deposit, withdraw, and transfer funds.
✔️ You can switch savings accounts as often as possible, as there are no lock-in periods.
Disadvantages:
❌️ Regular savings accounts have a lower interest rate than fixed-rate savings accounts.
❌️ Regular savings account rates are variable, so they can change.
❌️ Easy access can be a disadvantage if you need more self-control to withdraw your savings.
6. Fixed-Term Savings Accounts
Fixed-rate accounts typically require an initial deposit to open a savings account. The initial deposit can range from as little as £500 to as high as £10,000 and upwards. The idea is that once you deposit your money, it's locked into your account at a fixed interest rate and a fixed term, and you'll earn interest on the overall sum.
Advantages:
✔️ You'll earn higher interest rates than easy-access accounts or regular savings accounts.
✔️ Due to fixed terms and interests, you get a guaranteed interest rate.
✔️ You can't spend the locked cash, so you can't accidentally spend it.
Disadvantages:
❌️ You can't access the cash even in the event of an emergency.
❌️ You can't switch to a new savings account as you're on a fixed contract.
❌️ You can't move your money if inflation rises.
Fixed VS Variable Interest Rate Savings Accounts
Deciding between a fixed or a variable-rate savings account can be tricky as each has benefits, and it all comes down to your needs and savings account rates to make your money work harder. We've come up with a list of advantages and disadvantages of both types of interest rate accounts:
With fixed interest rate accounts, you lock away a lump sum of money under fixed conditions and leave it to earn a fixed interest.
Advantages of fixed-rate savings accounts:
✔️ Higher interest rates than variable rate accounts.
✔️ You'll know how much interest your savings will earn.
✔️ The interest earned can be paid directly to your account.
Disadvantages:
❌️ You can't add to savings.
❌️ You may need to deposit a minimum amount to open an account.
❌️ You can't take advantage of increased interest rates.
When you open a variable-rate savings account, the interest rate can change over time. So, the interest rate you open the account with isn't fixed and can increase and decrease with time.
Advantages of a variable rate savings accounts:
✔️ These accounts are flexible so you can move to a different account with better interest.
✔️ You can add to your savings whenever.
✔️ A more comprehensive range of savings accounts is available with variable rates.
Disadvantages:
❌️ As interest rates change, you'll never know how much you could make on your savings.
❌️ Interest rates are usually lower in comparison to fixed-rate accounts.
❌️ The variable interest rate can change.
7. ISAs
An ISA is a class of retail investment arrangement that's available to residents of the UK. You can save up to £20,000 tax-free with ISAs as they allow you to put your ISA allowance to work and maximise the potential returns you make on your money. Interest earned in an ISA is typically tax-free. There are four types of ISAs:
- Cash ISAs: a cash savings account in which you don't pay any tax on interest made. You can only open one Cash ISA a year; the contribution limit is £20,000. You can transfer funds from this ISA into other ISAs if you wish. Some Cash ISA providers offer a more flexible Cash ISA, which means you can withdraw and replace money from your ISA without reducing your yearly allowance.
- Stocks and shares ISAs: access to various investments such as unit trusts, investment trusts, individual stocks and shares, corporate and government bonds and more. Stocks and shares ISAs allow you to invest, and all earned interest from your investment is tax-free, and you can only pay into one of these ISAs each tax year.
- Innovative finance ISA (IFISA): allows you to invest in peer-to-peer lending that benefits from earning tax-free interest. The idea is to join a network that pairs lenders and investors with individuals and businesses. IFISAs have flexible terms; however, they're not FSCS protected, so there is a higher risk with this type of account.
- Lifetime ISAs: created to help young people save for a house or retirement. The government will give you a 25% bonus for contributions up to £1,000 every tax year. You can put up to £4,000 into a LISAs every tax year. You can only apply for a Lifetime ISA if you're between the age of 18-40. You can no longer pay into your ISA when you turn 50, but your savings will still gain interest over time. You can access your money without paying a fee and tax when you buy your first house, reach 60 or are diagnosed with a terminal illness.
If you pass away or a spouse dies, you can inherit ISA savings as a one-off additional allowance. The allowance will equal the value of the ISA savings held in their account, which means you can keep these savings as tax-free ISAs.
However, if inheritance goes to children or other relatives, ISA savings pass to the estate, but they'll no longer be tax-free. ISA savings will be subject to Inheritance Tax under the same rules as the rest of the estate.
Advantages:
✔️ Tax-free withdrawals: you can withdraw funds from cash and investment ISAs.
✔️ Inheritance: If you pass away, you can pass your ISA savings on to your spouse.
✔️ Wide investment choice: you can choose to invest in bonds, stocks and shares, and more.
Disadvantages:
❌️ Contribution caps: ISAs have a contribution cap of £20,000 for the current tax year 2023/24.
❌️ Allowance rollovers: you can't carry allowance from previous years.
❌️ No tax relief: there isn't tax relief for ISA contributions. However, returns are interest-free.
8. Online-Only Savings Accounts
Online savings accounts are slightly different from traditional ones offered by brick-and-mortar banks. Instead of visiting your bank in person, you handle everything online so you can access your savings account anytime via your smartphone or laptop.
Like any other savings account, you can earn interest with an online savings account, and most online savings accounts allow you to deposit money from a linked bank account.
Just like traditional savings accounts, you can get different types of online savings accounts:
- Fixed-rate bonds: feature competitive interest rates and are an excellent option to lock away your money for a fixed period.
- Notice accounts: offer competitive variable rates, and you can set your notice periods.
- Easy access accounts: the most flexible online savings account with the freedom to withdraw your money whenever you need. This account has lower interest rates than fixed-rate bonds and notice accounts.
Advantages:
✔️ Online banks usually offer higher interest rates for savings accounts.
✔️ Easily accessible as you can manage your savings from anywhere.
✔️ Usually free to open or have low fees.
Disadvantages:
❌️ Banking websites and apps can occasionally go down.
❌️ There’s no option for branch access or in-person contact with staff.
❌️ Online savings accounts may be challenging if you need to get used to online banking.
9. Business Savings Account
A business savings account is similar to a personal savings account. However, these accounts are specifically built for businesses with additional features:
- Access to business tools and services: business notice accounts offer you everything a personal account does but with more features like cash management, business credit cards, business investment, and merchant services.
- Financial Services Compensation Scheme (FSCS) Backed: if any issues occur with your bank or credit union, the FSCS will compensate you for any losses.
- Higher interest rates: business accounts have higher interest rates.
10. Under 18s Savings Account
This savings account is open on behalf of a child by their parents or guardian. Opening a savings account for a child gives them a financial head-start and is a great way to teach them about money.
Additional Features to Look Out for
Interest rates are essential for your savings account, but there are other features you should consider equally.
Outstanding savings accounts offer multiple features to make your life easier.
Features to look out for:
- Easy transactions: you must ensure you can easily make deposits and withdrawals with little to no fuss.
- Cross-product benefits: some providers offer rewards and benefits for opening savings accounts if you're already banking with them.
- Bill Payments: most banks offer you the ability to make utility payments directly from your savings accounts if any unexpected bills crop up.
- Online banking: this is a great feature to have with a savings account, as you can use your savings account on the go.
So, now that you're all clued-up on the different types of savings accounts let's explore why you shouldn't use your current account for your savings.
Why You Shouldn't Use Your Current Account for Savings
There are many reasons why you should open a savings account. You may be wondering why you can't just use your primary bank account to save, and you can, but here are some of the reasons why you shouldn't:
- Monthly fees: some high-interest-paying savings accounts charge fees.
- Lower interest rates: savings accounts allow you to make extra money with interest rates typically higher than your current account.
- Dipping into funds: You can accidentally spend your savings using the same account for your savings and daily allowances. Having different savings accounts can eliminate this problem.
Now it's time to explore how you can go about opening a savings account.
How to Open a Savings Account
Almost everyone can apply for a savings account; if you're a UK resident with a fixed address, you can open a savings account.
You'll need the following documentation to open a savings account:
- Proof of address: you can use a utility bill, telephone bill, council tax bill, tenancy agreement or mortgage statement.
- Proof of identity: you'll need an EU identity card, passport or driver's licence. If you're opening a savings account for a child, you'll need their birth certificate.
- Proof of income: This is only sometimes required, but if it comes up, you can use pay slips, bank statements, P60, a letter from a recognised employer or tax returns if you're self-employed.
Final Thoughts on Opening a Savings Account
Keeping your everyday account separate from your savings account is one of the best ways to stash money aside and earn interest on your savings. With many savings accounts to choose from, it's time to start earning interest and increasing your savings efforts.
Looking for an easier way to narrow your search for the best savings account? You can find and compare savings accounts online in one place at Compare Banks.
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