How to choose the right savings account

Published:
28 June 2010
Topic:
News,Money,Savings

With interest rates at an all-time low life's tough for savers. But rather than being despondent and taking the attitude that there is little point in saving at the moment, it's time to take action and ensure you are earning the best return possible on your hard earned cash.

The good news is that there is a large gap between the average savings rate - which is less than the 0.50% Bank of England base rate - and the rates on the leading deals.

However, with so many different savings accounts to choose from and potential catches to watch out for, how do you choose the best deal for your needs?

We take a look at the main types of savings account and features to look out for when you're comparing products so that you find the right account for you...

Easy access accounts

Easy access accounts (also called instant access and no notice accounts) are the most popular type of savings vehicle because of their flexibility. You can dip in and out of your savings whenever you want and deposit money into the account as and when you have some to spare. Rates are variable so they tend to fall if the Bank of England cuts the base rate (and go up if base rate is increased). However, in theory the rate can change at any time so it is important to check it regularly and ensure it remains competitive.

There are some common 'catches' you need to watch out for when comparing easy access deals:

Introductory bonuses - Many of the highest paying accounts include a bonus which runs for a certain length of time, often 12 months. Once the bonus period ends the rate will fall, often quite significantly, so if you opt for this type of account you will probably need to move your money again at that time.

Withdrawal restrictions - It is often assumed that easy access accounts allow you to get at your money whenever you want without penalty, but this is not necessarily the case. You need to watch out for withdrawal restrictions. Some accounts only allow a certain number of withdrawals within a 12-month period. If you exceed that quota, you will be penalised - probably by losing interest.

Another tactic used by savings providers is not to pay interest in the month a withdrawal is made.

There is nothing necessarily wrong with these accounts as long as you understand how they work otherwise your annual return could be a lot lower than you were expecting. That said, there are still plenty of products that allow unlimited penalty-free withdrawals so if you don't want to worry about when you dip in and out of your savings, go for one of these deals.

Key things to check before you apply:

  • Minimum deposit
  • Withdrawal restrictions
  • Is there a short-term bonus?

Fixed rate bonds

If you are prepared to sacrifice flexibility and have money you can afford to lock away for a year or two, you may be able to earn a higher rate by opting for a fixed rate bond.

These pay a fixed amount of interest for a set period - fixed terms tend to range from six months to five years.

With base rate so low, fixed rate rate bonds have been a popular option with savers seeking to maximise returns. However, base rate won't remain this low forever so be careful of locking your money away for too long as you may find yourself stuck on an uncompetitive rate when the cycle turns and rates start rising again.

One of the main downsides of fixed rate bonds is you cannot normally access your money during the term so they are only suitable if you have savings you won't need in the near future.

Also, you can often only make one deposit at the time the account is opened so a fixed rate bond is no good unless you have a lump sum to invest.

Key things to check before you apply:

  • Minimum deposit
  • Length of term
  • Can you make additional deposits once the account has been opened?
  • What happens if you need to access the money during the fixed term?


Regular saver accounts

A regular saver can be a great option if you want to get into the habit of saving on a monthly basis. Like fixed rate bonds, these accounts pay a set rate of interest for a set term - normally 12 months - and the interest rates tend to be higher than on fixed and easy access accounts. This is because you are restricted as to the amount you can pay in - and take out.

In order to qualify for the advertised rate most deals require you to pay money into the account every month during the term. The minimum deposits tend to be quite low - £25 a month is usual - but the maximums are also relatively low - £250 or £300 a month.

Because the interest rates are higher than average, this stops wealthy savers from piling large amounts of money into the account.
Most accounts don't allow withdrawals during the fixed term, or pay a lower rate of interest if you do take money out of your account during that time.

Key things to check before you apply:

  • Minimum and maximum monthly deposit
  • Do you have to pay the same amount of money in every month?
  • What happens if you need to access the money during the fixed term?

Cash Isas

If you are looking for a savings account and haven't yet used your ISA allowance this tax-year then open a cash ISA because interest is paid tax-free, so they really are a no-brainer. The tax year ends on 5 April and you can invest up to £5,100 in a cash Isa.

Because of the valuable tax-break try and keep your money invested in an ISA for as long as possible because as soon as you withdraw it will lose its tax-free status.

There are different types of cash ISA account - easy access, fixed rate and regular saver - so use the information above to work out which is most suitable for you.

Just as non-ISA savings it's important to keep an eye on the rate you're receiving. While you lose the tax-break on any money you take out of a cash ISA, you can transfer money from one cash ISA to another without affecting the tax-free status.

Therefore, as well as looking for a home for this year's ISA allowance, look to see if you can improve the return on existing ISA investments. Not all cash ISAs accept transfers in however, so bear this in mind when comparing deals.

Key things to check before you apply:

  • Is it a fixed or variable account?
  • Minimum deposit
  • Are transfers permitted?
  • Are there any withdrawal restrictions?

And don't forget to spread your money...

The financial crisis, and particularly the collapse of the Icelandic banks, has focused attention on the security of providers. The Financial Services Compensation Scheme protects the first £50,000 held with a single institution (£100,000 if the account is in joint names). If you have more than this in cash savings spread your money between different providers. For more information on this, read our article, 'Who owns who?'.

Please note: Any rates or deals mentioned in this article were available at the time of writing.

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