Savings accounts: everything you need to know

by - 23/07/2020 in Savings
A complete guide to savings accounts

Savings accounts are essential to help grow your money and keep it safe, and choosing the right type is an important decision. Make the correct choice and you’re well on the way to achieving your savings goals. Make the wrong choice, however, and you may find that your money isn’t working as hard as it could be.

To help understand all of the options available, we’ve put together this complete guide to ensure you find the right type of account for you.

What is a savings account?

Simply put, a savings account is a way of earning interest on money that you can afford to put away. The type of account that you choose depends on the way you plan to save money.

How to create a savings plan

Before deciding on the type of account you need, it’s important to understand how you want to use it. A simple savings plan will answer a few key questions that will influence the type of account you choose to open.

  1. Decide how much you can afford to save
  2. Know how frequently you’re going to deposit money
  3. Understand whether you need regular access to your money, or if you can you leave it tied up for a longer period

Having a clear answer to each of these questions will help narrow down your search for the right type of account.

And most of all, be honest with yourself. There’s no point committing to save £500 a month if this then leaves you short of spare cash with a few weeks still left until your next payday.

Pick the type of savings account that’s going to fit your plan

The most popular types of accounts are easy access, notice, regular saver, fixed rate bonds and Individual Savings Accounts or ISAs as they’re more commonly known.

Here’s a bit more about each type of account and the different kinds of savings goals each one may be suitable for, as well as some of the pros and cons for each one.

Easy access

Easy access accounts are simple, straightforward accounts which let you earn interest, as well as allowing you access to your money as and when you need to.

Pros:

  • Pay money in whenever you want.
  • Withdraw from your savings whenever you need to.
  • Ideal for short-term savings goals or emergency funds.

Cons:

  • You won’t usually earn as much interest compared to other types of accounts.

Every savings provider will have their own terms and conditions, but with an easy access account, you can save and withdraw whenever you need to, without having to pay any fees or charges.

Because of the flexibility these accounts provide, the interest rate offered in return will often be lower than other options.

Notice accounts

With a notice account you won’t normally be able to access your savings without first giving prior notice that you need to make a withdrawal. Some savings providers will allow you to access your money without the required notice period being served, but you may end up paying a charge, or take a hit on the interest you’re receiving.

Pros:

  • Great for short to medium-term savings.
  • You’ll usually get a better rate of interest when compared to easy access accounts.

Cons:

  • Be prepared to wait out a notice period to withdraw your money.

How much notice you need to give with these accounts will vary from one savings provider to the next. The more common notice periods range from 30 days up to 180 days, so you’ll need to be sure that you don’t need access to your money quickly if you’re considering a notice account.

As a general rule, the longer the notice period, the higher the rate of interest you can expect to receive, so for example, a 90 day notice will usually have a higher rate than on a 30 day notice.

Notice accounts are 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.

Regular saver

Pros:

  • Often receive a higher rate of interest than other account types.
  • Great if you have something specific in mind that you’re saving for.

Cons:

  • Must be able to commit to saving each month.
  • Restrictive terms and conditions may end up with you being charged if you break them.

With a regular saver account you’ll need to commit to saving money each month, often for an agreed amount of time. In return, you’ll usually receive a higher rate of interest than most other types of accounts. 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 will often result in loss of interest or other charges.

Regular saver accounts can be ideal if you’ve got a particular savings goal in mind – maybe you’re saving for a deposit on your dream home or need to start squirrelling money away to make next Christmas an unforgettable experience for the kids. Whatever your reason for saving is, as long as you don’t mind committing to making a regular monthly deposit, a regular saver might be the account for you.

Fixed rate bonds

Fixed Rate Bonds generally offer a higher rate of interest for money that you can afford to put away for a year or more. As the name suggests, the rate of interest is fixed for the full term of the bond.

Pros:

  • Potential to earn greater rates of interest.
  • You know that the rate of interest you’re earning won’t go down during your fixed period.

Cons:

  • Only suitable for savings you can tie-up for longer periods of time.
  • You won’t usually be able to withdraw from your savings until the end of the fixed rate period.
  • Additional deposits are usually not allowed.

Most 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 will usually come at a cost, whether that’s a one-off charge or a loss of interest.

So before you tie your money up, be sure you can afford to get by without needing access, particularly as most bonds don’t allow the normal 14 day cooling off period should you change your mind after opening.

Fixed rate periods vary from one savings provider to the next, some will run until a fixed end date whilst some will run for a set number of months or years. And as general rule of thumb, the longer the fixed rate term, the higher the rate of interest.

Fixed rate bonds are suitable for your medium to long-term savings goals - as you’ll know in advance exactly how much interest you’ll earn.

ISAs

Simply put, an ISA (Individual Savings Account) is a savings account where you don’t pay tax on any interest you earn.

Pros:

  • Guaranteed tax free returns on your savings.
  • A variety of different types of accounts to fit most savings needs.

Cons:

  • Some of the types of ISA are more complicated than others.
  • Your capital may be at risk with some ISA types.

You’ve probably heard a lot about ISAs, but may be unsure as to why they’re different to other accounts. Don’t worry, we’ll go into some more detail about each type of ISA below, but before we do, you’ll need to understand how ISAs work.

How ISAs work

Each year the government sets out your annual tax free ISA allowance, this is the maximum amount of money you can pay into ISAs in the tax year. The allowance for the 2020/21 tax year is £20,000.

You can save your allowance in a single ISA, or split it between the different types. For adults, you can 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.

If you find that you still have questions about how ISAs work, take a look at the 9 most important ISA questions you need to ask before opening one.

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. Just like ordinary savings accounts, you’ll find easy access, notice and fixed rate Cash ISAs, and the rules tend to be similar as well.

    With an easy access Cash ISA, you’ll be able to deposit money as a lump sum or add to your savings whenever you have spare cash available. Interest rates are generally lower than notice and fixed rate Cash ISAs, but the withdrawal restrictions are more relaxed to account for this.

    Notice Cash ISAs operate in a similar way, interest rates are usually higher, but you’ll need to provide notice to access your savings. As with the easy access equivalent, you’ll generally be able to add to the account whenever you’re able or pay in a lump sum. It’s your choice, just as long as you don’t go over your annual allowance.

    And finally, there’s the fixed rate Cash ISA. Interest rates are again increased and fixed for a period of time, but withdrawals are much more restricted in return and you won’t normally be able to add any more money after you’ve set up the account. Unlike normal fixed rate bonds though, you will be able to withdraw before the end of the fixed rate period, however this will often result in a charge to do so.

  • 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. Lifetime ISAs were introduced by the government to help 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 Lifetime ISA 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 Lifetime ISA 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.

    This could be the account for you if you’re looking to make your first steps onto the property ladder or are prudently adding to your retirement fund.

  • 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 2020/21 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 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.

If you’re still unsure about ISAs and you’d like to read up on the different types in a little more detail, take a look at our guide to understanding different types of ISA.

A complete guide to savings accounts - How interest rates work

How interest rates work

Most banks and building societies will have two types of customers – savers and borrowers. The money you save will be pooled together with the money deposited by other savers and they’ll then lend most of this to their borrowers to help them buy their homes.

When borrowers pay back interest on their loans or mortgages some of this interest will be given back to you in return for leaving your money with them, helping your savings grow.

So when you save, as well as earning interest you’re also helping others fulfil their home-ownership dreams - it’s a nice cycle - the more people save, the more banks and building societies can lend to mortgage borrowers which leads to a healthy, growing economy.

Interest is usually paid annually, although you’ll find accounts which give you the option to have your interest paid monthly and you can choose to have it either paid back into your savings account, or paid away to another account where you can then choose to do as you please with anything you’ve earned.

Compound interest

Compound interest is interest paid on the balance of your account as well as on any other interest that you’ve previously earned, meaning the interest is compounding. In other words, you receive interest on interest.

As a general rule, your savings will grow quicker if you choose to leave the interest in your savings account so that it compounds. Over time, you’ll really start to notice the positive effect of compounding.

When you’ll get paid interest

The day you receive your interest will vary - some banks and building societies will pay interest on a particular date each month or year, 31 December for example is a common date for annual interest to be paid, whilst some will pay it on the anniversary of the date you funded your account.

The personal savings allowance

Another thing to bear in mind is the personal savings allowance, which the government introduced in April 2016. Under the allowance, any interest you earn up to your personal limit will be free from income tax. The allowance is different depending upon which tax bracket you fall under - for UK basic rate taxpayers the personal allowance is £1,000, for higher rate taxpayers it’s £500, while additional rate taxpayers aren’t eligible for an allowance.

A complete guide to savings accounts - Choosing a savings provider

Choosing a savings account provider

So you’ve done your research and settled on the right type of savings account that will help you achieve your financial goals. Next, you need to decide which savings provider to deposit your money with.

But with so many to choose from, how do you decide?

A good starting point is to use a comparison website to see all of the interest rates available. It can be tempting to go for the savings account with the best rate, however it’s always worth finding out more information about a particular savings provider first.

It’s easier than ever to voice your opinions on how you’re being treated as a customer, and a quick search for reviews of the provider that you’re considering will include results from third-party customer review sites such as Trustpilot, giving you an idea of the service that others have received.

You may also want to consider how you’d like to manage your account. If you’re planning on doing your banking in person, you’ll want to find a savings provider that allows you to operate your account in a branch. Likewise, if you’d rather manage your savings over the phone, online or by post, you’ll need to find a provider that lets you do so. Some providers will let you do one but not the other, whereas some will offer all methods of saving, so a bit of research at this stage will mean that you get the access to your savings that you need.

A complete guide to savings accounts - Keeping your savings accounts safe and secure

Keeping your savings accounts safe and secure

You’ve worked hard to build up your savings pot, so it’s perfectly natural to want to know that your hard-earned cash is going to be kept safe.

Fortunately, savings held with UK banks, building societies and credit unions that are authorised by the Prudential Regulation Authority and the Financial Conduct Authority are protected by the Financial Services Compensation Scheme (FSCS). The FSCS is the UK’s deposit protection scheme and was set up to protect savers. Under the Scheme, if an authorised financial services firm were to go bust, your savings would be protected up to £85,000 per individual, per financial institution, so up to £170,000 for joint accounts.

You should always remember that the protection limit is per bank, building society or credit union, and not per account, so if you have more than £85,000 in savings, you should consider splitting this up between more than one institution to ensure its all covered.

Another point to consider is savings held across a financial group. Sometimes organisations will share their banking licence across multiple savings brands within their group. If this is the case then the FSCS limit won’t cover you for every brand so it’s well worth doing your homework first. You can visit the FSCS website to check your provider is protected by searching for its name.

Whether you're saving longer term, or looking for a home for money that you can access quickly, take a look at our range of straightforward savings accounts and join more than 500 of our customers on Trustpilot who’ve rated Charter Savings Bank as excellent.

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Financial Services Compensation Scheme

Financial Services Compensation Scheme

Your eligible deposits with Charter Savings Bank are protected up to a total of £85,000 by the Financial Services Compensation Scheme, the UK's deposit protection scheme. Any deposits you hold above the limit are unlikely to be covered. Please click here for further information or visit www.fscs.org.uk.