Guide to Savings Accounts
There are many different types of Savings accounts, not all will be the right type for you. Savings accounts most commonly fall into one of the five types of accounts listed below:
- Easy Access/ No Notice Accounts
- Notice Accounts
- Bonds or Term Accounts
- Regular Saving Accounts
- Tax-Free Accounts
Easy Access/ No Notice accounts
These types of accounts offer instant access to your money without having to give any notice or pay any penalty. Due to the flexibility of these accounts the interest rates offered are normally slightly lower than other types of accounts. Most Easy Access accounts can be opened with as little as £1, which make them a good type of investment for people who are starting to save but may need the money at short notice. Some Providers have bonus and incentive schemes tied into the account in order to offer a higher interest rate. This could mean the number of withdrawals or amount you deposit is restricted. Interest rates are variable and may change regularly to reflect the Bank of England base rate. Click here to compare easy access savings accounts.
Pros of easy access accounts:
- Immediate access to your money whenever you need it
- No notice or penalties on the accounts
- Can often open the account with as little as £1
- If Bank of England base rate increases rates are normally changed to reflect this within one month.
Cons of easy access accounts
- Interest rate not as high as other types of accounts
- Rates are usually variable which if the Bank of England base rate fell, the rates would change to reflect this i.e. decrease.
Notice Accounts
These types of accounts offer a good rate of interest in return for notice being given when a withdrawal is required. Providers can require any amount of notice from 7 days' up to and including 120 days'. However, the most common notice period is 30 to 60 days' notice to make a withdrawal penalty-free. Instant access to your savings can sometimes be given subject to an interest penalty on the account. This is normally the loss of interest for the period of notice, which was required to make a penalty-free withdrawal. For example, an account requires you to provide 60 days' notice before you make a withdrawal. You make an instant access withdrawal on the account; the penalty will most likely be 60 days' loss of interest on the amount withdrawn. Click here to compare notice savings accounts.
Pros of notice accounts
- Rates are normally higher than Easy Access accounts.
- Rates are variable and will change to reflect the Bank of England base rate. If this increases the account rates are normally changed to reflect this within one month.
- Notice has to be given for withdrawals, which, for people trying to save stops them from dipping into the account.
Cons of notice accounts
- Penalties are paid if immediate access to the money is needed. The usual penalty is the loss of interest on the amount withdrawn for the length of notice required on the individual account.
Bonds or Term Accounts
Bonds or Term accounts are high interest savings accounts offering the most competitive interest rates. These accounts require money to be tied up for a specific period of time. Once a bond has been opened you are not usually allowed to add to your initial deposit. The money in the account is tied up for a specific length of time, usually 1 to 5 years. Most Providers do not permit any type of withdrawal before the maturity date. If withdrawals are allowed then a penalty will normally be incurred. The interest rate on most accounts is fixed from opening the account until the maturity date. Click here to compare bonds or term savings accounts.
Pros of bonds or term accounts
- Rate of interest paid on bonds accounts are usually the best on the market.
- Excellent account for people who have spare money and can afford to tie the money up for a fixed length of time.
Cons of bonds or term accounts
- Interest rates paid on bonds are fixed for the length of the bonds, or if not fixed predetermined by the bank or building society. Therefore if the Bank of England base rate interest increases considerably within that time the rate offered on these accounts will not change to reflect this.
- Access to money at short notice is not permitted in most cases.
- Most Providers do not permit further deposits once the initial deposit has been made.
Regular Savings Accounts
These accounts require you to save money on a regular basis. You are required to invest money, usually a set amount, into the account each month. Most accounts do not allow lump sums to be invested upon opening or while the account is open. Providers normally set down a minimum and maximum deposit limit when you open the account. Access to these accounts may vary from Provider to Provider. Most common accounts are instant access, however notice and fixed term accounts are available.
Regular Savings accounts normally have far more restrictions put on them than any other type of account. The interest rate advertised for most accounts include a large bonus, which is received on the condition 'X' amount of deposits is made and/or 'X' amount of withdrawals or no withdrawals are made. If these conditions are not met the interest rate received is far lower. Click here to compare regular saver savings accounts.
Pros to regular saver accounts
- A fixed amount is transferred into the account each month allowing the amount being saved to increase quite quickly.
- Most accounts are variable which, if the base rate increases, will see the rate paid on these accounts increase within 30 days of the change.
Cons to regular saver accounts
- You are unable to make lump sum deposits into the account
- There is a maximum and minimum amount which you can deposit each month.
- Maximum deposit is usually limited to £1,000.
- Some Providers put restrictions on to obtain some higher interest rates i.e. a limited number of withdrawals and a minimum amount of deposits have to be made.
Tax-Free Accounts
Mini Cash ISAs, Maxi ISAs and TESSA only ISAs are all tax-free and a good way to invest your money. There are, however, limits set down by the Government to how much can be invested each year. For Mini and Maxi ISAs, the maximum amount of money you can invest in a cash component of each account is £3,000 per year. An exception to this is if an individual has a mini-ISA they can invest up to £4,000 in the Stocks and Shares component as of 6th April 2005, the insurance mini-ISAs are no longer available. Once this limit has been reached no more can be invested until the next tax year (April 6th - April 5th). The cash limit reduces after the tax year 2005/2006 to £1,000 per year.
A TESSA only ISA can only be opened with the capital from a maturing TESSA. After which, the maximum amount permitted to be deposited into the account is £9,000 per year. Interest earned from the TESSA cannot be added to a TESSA only ISA. This must be paid into a different account when the TESSA matures. View our ISA guide or click here to compare mini cash ISAs and TESSA-only ISAs.
Pros of tax-free accounts
- The obvious benefit from having an ISA account is that the money is tax-free.
- Interest rates are as good as normal Savings accounts
- Some accounts are variable and follow the Bank of England base rate, therefore if this rate increases so does the rate paid on the ISA.
- There are three different components to a Maxi ISA - Stocks & Shares, Cash and Life Assurance. The mini-ISA has two different components- Stocks and Shares, and Cash. You can save up to £7,000 across all three components.
Cons of tax-free accounts
- A maximum of £4,000 only can be invested into an ISA each financial year. If you have more to invest you have to either wait until the next financial year or invest the money into a normal savings account.
- The Government only permits one ISA to be opened each financial year.
Interest Rates
To understand the difference between AER, Gross and Net interest, a definition of each is below:
Annual Equivalent Rate (AER)
This is the rate of interest one would receive if the gross interest was paid and compounded each year.
Gross Interest
This is the rate of interest before deduction of income tax.
Net Interest
This is the rate after appropriate rate of income tax (currently 20%) has been deducted.
Common tricks and issues to watch out for when looking for a Savings Account
Some banks and building societies commonly deploy tricks and issues, which people need to look at when applying and opening savings accounts. The most common tricks are:
Bonus - The most common trick is to offer an initial bonus on the account. Adding this bonus to an account enables a Provider to top best buy tables and trick people into thinking they have a good rate of interest. The bonus normally is only applicable to the account for the first 6 months to 1 year of the account being opened. After this time the rate will revert to a lower interest rate.
Withdrawals - Some Providers offer a higher rate of interest if a limited number of withdrawals are made each year. This can be less than 1 per month; some accounts even require no withdrawals to be made to earn a bonus.
Closed accounts - Some Providers offer accounts, which offer a good rate of interest. These accounts are only opened for a short period then are closed to new investors. Gradually the rate of interest is reduced on the account until the rate is less competitive. This is something you have to watch out for and recommend you check the interest rate being paid on your savings account regularly. Also keep an eye on new accounts coming on to the market. More times than not the rates offered for new investors are higher than the rates being paid on closed accounts.
How to apply
Most Providers offer four different ways for people to open a savings account:
- Branch
- Telephone
- Post
- Internet
However, a handful Providers, such as National Savings and Investments, allow the day-to-day running of accounts to be made at The Post Office.
Financial Services Compensation Scheme
The Financial Services Compensation Scheme (FSCS) was created and put into operation in December 2001. It was brought in to replace the Building Societies Investor Protection Scheme, Deposit Protection Scheme and several other schemes previously in place. The FSCS was introduced to protect customers against firms that go into liquidation or out of business.
The scheme is activated when an authorised firm goes out of business or the Financial Services Authority (FSA) considers that an authorised firm is unable or unlikely to be able to repay their customers.
Most customers are protected under this scheme and are entitled to the following amount of compensation:
- 100% of the first £35,000
N.B.This limit doesn't apply to firms that defaulted before 1st October 2007; then you get 100% of the first £2,000 of your cash back and 90% of the next £33,000 on top; so you'd get £31,700 of the first £35,000 back.
The compensation limit applies to individuals and covers the total amount of all their deposits held with that firm. Each individual in a joint account is eligible to receive compensation up to the maximum limit in respect of his or her share of the deposit. The FSCS assumes the account is equal and splits it 50:50 unless evidence shows otherwise. It is also worth noting that where one authorised firm owns several savings brands, all accounts held with this firm are treated as one for the purpose of this compensation scheme.
Tax
All savings accounts will have the interest earned taxed except ISA's, which are tax-free. The Government has given each individual (depending on their age) a personal allowance. This means individuals are eligible for a certain amount of their income to be tax-free. The amount individuals are entitled to are shown in the table below:
| Personal Allowance | Year 2006/2007 |
|---|---|
| Up to 64 Years | £5,035 |
| 65 - 74 Years | £7,280 |
| Over 75 Years | £7,420 |
If the total income of an individual, including earnings and interest, is less than the personal allowance, then an individual is entitled to receive interest tax-free by filling in a R85 form. If the tax has already been deducted from an account, an individual can claim the money back by filling in a R40 form.
When the tax is calculated an individuals personal allowance is deducted from the total of taxable income. Tax is only paid in the remainder of an individual's income. The amount of tax each individual receives will depend on the amount earned each year. See table below for tax allowance:
| Tax Bands | Year 2006/2007 |
|---|---|
| Starting Rate 10% | £0 - £2,150 |
| Basic Rate 22% | £2,151 - £33,400 |
| Higher Rate 40% | £33,400 and Over |
Children's Savings Accounts
With the rising costs of living and children's education, it is important to start savings as soon as possible for your child. With over 167 child savings accounts around at the moment it is important to look around and make sure you are getting the most back from your child's savings. Click here to compare over 167 children's savings accounts.
Children's savings accounts work in a similar to adult savings accounts. There are different types of account:
- Easy Access
- Notice
- Bonds or Term
Most children's savings accounts are easy access allowing money to be withdrawn without notice or penalty. Some accounts require notice to be given before a withdrawal, to allow a penalty-free withdrawal. These accounts normally offer a higher level of interest than easy access accounts. Bond accounts offer the highest interest but to receive this, the money invested normally has to be left in the account for a specific period. This could vary from 1 year, up to 5 years or some providers require money to be left until the child has reached a certain age.
There is no minimum age for a children's account to be opened, however most Providers require a Parent or Guardian to open and run the account until the child is between 7 - 11 years old. Most accounts run until the child is 18 years old when, if not specified at the time, will be transferred over into an adult savings account.
To encourage a child to save their money most Providers offer incentives when an account is opened. This can range from posters to vouchers to naming the account themselves. The idea behind this is to start to encourage children to take an interest in saving money. However, the gift is not the most important part of an account so look beyond it and find out what interest rate is offered on the account.
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