Savings accounts are bank accounts that let you earn interest, some let you keep easy access to your funds, make regular deposits, or lock away the balance.
By Laura Rettie, Personal Finance Journalist.
Savings accounts can help your money go further. Our guide will go through your options and how they work.
A savings account is a bank account used to store money. These accounts will usually pay you a small amount of interest, represented as AER, on the amount that you deposit.
With interest paid to you, you can generate a profit when putting money in a savings account, making them a helpful tool to grow your money.
Savings accounts are perfect if you have a large sum of money that you don't immediately need and can instead save it to be used at a later date.
Many people use savings accounts to save for a house, wedding, or other large purchases and life events. Some people may also have an emergency savings account that can be used to pay for any unexpected expenses without affecting their monthly income and budget.
A current account is a bank account designed for you to manage your day-to-day spending and access your money quickly. A current account can be used to pay others, receive a wage, and set up a direct debit. You can also apply for an overdraft with a current account.
This isn't possible with a savings account, instead, you save money that over time accumulates interest on your money, meaning you’ll have more money the longer you save.
There are some current accounts available that offer interest on the amount that you put in them, but these will have multiple criteria you'll need to hit to be eligible. These commonly include that you:
There are a few different types of saving accounts where you can save money to earn interest. Savings accounts interest rates will be slightly different based on their individual benefits.
These saving accounts allow you to access your savings whenever you want. Some accounts even provide you with a card, making it easy to use your savings account to withdraw cash.
Easy access saving accounts are best used as emergency savings in case you need money to help pay for unexpected expenses, you'll be able to get access to funds without any hassle.
As a result of their flexibility, the interest rates on these accounts may be the worst out of all the other options. However, some do offer competitive introductory interest rates for new customers. Just remember that when this period ends, you might be moved to a worse interest rate.
Notice saving accounts differ from easy access ones because instead of being able to withdraw your money freely, you'll have to notify your provider in advance that you want to withdraw money.
Depending on your account, you'll have to notify your provider 30, 60, or 90 days ahead of time, making them unsuitable if you need to get to your savings unexpectedly or quickly.
They do offer higher interest rates than easy access saving accounts on average, so if you're happy to wait for your money to become available, they can be a good option.
Regular savers work by depositing money into the account each month. Usually, these accounts will restrict the amount that you can deposit at one time and will only allow you to deposit money once a month, stopping you from adding money as and when it suits you.
These types of accounts best suit savers who don't have a large sum to deposit straight away.
The best regular saving accounts offer sizeable interest rates, with 5% AER being a standard rate. However, as you gradually add money every month, you're not earning interest as quickly as if you deposit your money as a lump sum from the start. It can make a rate of 5% AER more modest in reality.
With a fixed-term saving account, you'll be depositing your money for a set period specified at the start of the term. You cannot withdraw any of the money during this period, effectively meaning that it's locked away until your term ends.
You can get fixed-term accounts that extend over a year or two, and some can last up to five years. Because your money is locked away for a considerable period, these accounts usually have the best savings rates, with the best fixed-term saving accounts advertised at 2.5% AER, making them one of the best interest savings accounts available.
These accounts best suit those who are confident that they'll not need to access the money they're saving for the specified term. If you need access to your money in an emergency, some accounts will allow you to make a withdrawal but may charge you a hefty fee to do so or you may lose any interest you’ve accrued altogether.
If you go over your personal savings allowance - which is an amount of interest that you can earn tax-free - you'll have to pay tax on your savings.
For those in the basic tax rate, which is those who earn up to £50,270, your personal saving allowance is £1,000 worth of interest. If you earn interest worth more than this, you'll have to pay 20% tax on this additional amount.
Cash ISAs can be useful in this situation, as they generate tax-free interest. This means that you won't have to pay tax on any interest you earn with an ISA.
The catch with cash ISAs is that you can only put in a set amount of money each year, currently £20,000. If you have more to save than this, you'll have to get a different type of savings account, because you can only have one cash ISA for each tax year.
Premium Bonds are a unique type of saving account - instead of having a guaranteed interest rate that you'll earn each year when you buy premium bonds, each bond you have is instead entered into a monthly draw where you can win cash prizes ranging from £25 to £1 million.
It's hard to generate interest with Premium Bonds, and the closest you’ll get to earn additional money on top of your savings is by winning a prize, which currently on average, you have a 1% chance of winning. In truth, the likelihood of winning with Premium Bonds is relatively low, but you can learn more about premium bonds here.
To earn the most interest from your savings, you'll need to find the savings account that offers the best savings interest rates, displayed as AER. AER is a metric that measures the interest rate and stands for the average equivalent rate. Your AER percentage means that you'll earn that amount of interest in approximately one year.
Currently, long term fixed saving accounts offer the highest AER, with the best accounts offering 2.4-2.6% AER depending on how long you want your fixed term to be.
However, AER isn't everything. To earn the most money out of savings accounts, you'll also have to factor in bonuses, the amount you put in, and if you're depositing it as a lump sum or instalments. The best banks for savings accounts may offer discounts and cash bonuses for new customers, increasing the value of their accounts.
A savings account that has £15,000 in it with a 1.5% AER will earn about £225 per year. A savings account with £7,000 in it with a 2.6% AER will only earn £182, despite the higher interest rate.
There's no limit to the amount of savings accounts you can open, and the best banks for savings accounts will let you open more than one account with them.
Depending on your circumstances, it might be necessary to have more than one savings accounts to maximize the amount of interest you can earn. This is because some accounts have a maximum deposit limit. If you have more to save than this limit, you'll have to put it in another savings account.
Be aware that the more savings accounts you have, the harder it may be to manage your money. It's unlikely that saving accounts will come with fees, meaning that you won't be charged for having multiple accounts in most circumstances, but some saving accounts that offer rewards may have an annual fee.
It's unlikely that you'll be charged for having a savings account, especially if you have a fixed savings account that you can't withdraw money from freely. This is because, even though the bank may be losing money by paying you interest, they're able to use your money to fund loans to other people.
By giving your money to a bank for a fixed amount of time, you're actually providing them with a service, not the other way around. This is why you generate interest in the first place, as a payment from the bank. Savings accounts are much cheaper for a bank to administer, contributing to a low or nonexistent fee.
Before you open a savings account, you must be clear on a few things to choose the best type for you. Some things to research include:
What you want to get out of your savings account will impact which type of account you should open. If you want an account for a large lump sum of money to accumulate interest, and you know you won't need access to your money, then a fixed term saving account would be best.
If you're saving for a house and might need to access your account but don't know when, a notice account may suit you better.
If you need regular access to your savings in case of emergencies, then an easy access account will best suit you.
To choose the best savings account, you'll need to factor in how you intend to use it.
Some savings accounts will only let you withdraw and deposit a certain amount of money at a time, and this will depend on the saving account you choose.
For example, a regular saver account will have a maximum deposit limit for each month, typically £250. Other accounts, such as a cash ISA, will only let you deposit £20,000.
As well as limits to the amount you can deposit and withdraw, some savings accounts will also limit the frequency you can do this. Some accounts don't let you withdraw at all, while others need notice or only give you a certain number of withdrawals before you have to pay fees.
Be aware of these limits to make sure they suit your financial goals.
Depending on the saving account you choose, you may be charged for withdrawing money from your account, particularly if you're saving with a fixed-term account.
You can also be charged for withdrawals if you go over the number of withdrawals you're allowed to make. These charges can either be a percentage of the amount that you're taking out or a fixed amount.
You can either be offered a fixed or variable AER when opening a savings account. This means that the interest rate offered to you can either stay the same throughout your saving period (fixed) or change over time (variable).
The top savings accounts will typically offer a fixed AER.
If you get a variable AER, it's likely that it will drop to a weaker interest rate if it does change. This is common if you're offered an introductory rate to entice you in, which is where you're offered a higher AER for a brief period. Check how long your introductory period is, and when it's over, consider switching to a different account with a better AER if your terms allow you to do so, without losing out.
Much like other financial products, there are both positives and negatives to opening a savings account.
To open a savings account, you'll need to be over 18 years old and be a UK resident.
When applying, you'll need to provide evidence of your identity and that you have a permanent address in the UK. Some things that can be used as evidence include:
To apply for a savings account, you can either do so online through your chosen provider's website or visit a bank in person.
When opening a savings account, a bank won't typically need to check your credit score, meaning that if you do have bad credit, that shouldn't stop you from opening a basic savings account.
The best online savings accounts will offer apps to help you manage your accounts from your mobile device, giving you more control over your money.
The information provided does not constitute financial advice, it’s always important to do your own research to ensure a financial product is right for your circumstances. If you’re unsure you should contact an independent financial advisor.
We're on a mission to improve the finances of the nation by helping you to spend wisely and save money
We're on a mission to improve the finances of the nation by helping you to spend wisely and save money
You need to be 18 years old to open a savings account while also being a UK resident, and you can open a cash ISA at 16.
The vast majority of saving accounts will allow you to open a savings account with a single £1, which is the minimum you can have within a savings account.
Yes, but the ease of doing this will depend on the savings account you're using.
If you're using a fixed-term savings account, you can only withdraw your money at the end of your term, which can be between 1-5 years, depending on what you choose.
To take money out of a notice saving account, you will first have to notify your account provider and then wait out the notice period before you can access your money. This period can be 30, 60, or 90 days depending on your account.
If you plan to take money out of a savings account frequently, it's best to get an easy access saving account.
With these, you'll be able to withdraw money instantly. Do be aware that some savings accounts will limit the number of withdrawals you can make in a set period. If you go over this, you may be charged when you try to take out more money.
Depending on how much you earn, you may have to pay tax, but this is unlikely for most people.
Everyone has a personal savings allowance. This is where the interest you earn is tax-free, up to £1000 worth of interest. This means that if you earn £1000 in pure interest, you'll have to pay tax on any value over that amount.
If you're on the basic tax rate, which means you earn between £12,571 to £50,270, you'll pay 20% tax on the interest earned over £1000. If you're on the higher rate, you'll pay 40%.
However, interest earned through cash ISAs is tax-free, meaning that if you're earning enough interest where you need to pay tax, it may make sense to use a cash ISA for your savings.
AER is a term used to measure savings account interest rates. It stands for the annual equivalent rate and is shown as a percentage. The AER is the amount of interest you're expected to earn after a full year.
For example, a 1.5% AER on a sum of £1000 means that you should earn £15 interest if you leave the money in the account for a year.
AER can be variable or fixed, meaning that the rate will change over time (variable) or stay the same (fixed).
