When choosing which savings account to go for, you need to think carefully about whether you will need access to your money, how long you are looking to save for, and how you want to operate it. For example, do you do all your banking online, or do you like being able to pop into a bank branch and talk to someone face-to-face?
Here, we explain what you should watch out for, so that you can find the right savings account to suit your requirements.
Easy access accounts
If you want to build up a rainy day fund which you can access whenever you need to, you’ll need an easy access account.
However, don’t assume that just because an account is marketed as easy access, you’ll be able to make withdrawals whenever you want to. Often you may only be able to make a set number of withdrawals a year, so always read the small print carefully before applying.
If the account you are interested in does restrict the number of withdrawals you can make, you must be certain you won’t exceed this otherwise you could be charged a penalty, such as loss of interest on the amount withdrawn.
If having immediate access to your savings isn’t top of your priority list, you might want to consider a notice savings account instead.
This type of account requires savers to let the provider know in advance that they want to make a withdrawal. Typically notice periods start from 30 days, but can be as long as 120 days or more.
Savings accounts usually come with a minimum investment limit, but plenty can be opened with just £1.
The main reason people traditionally have opted to save into a notice account is that they supposedly offer higher returns than instant access accounts.
However, the difference between the returns offered by these two types of account has narrowed significantly in recent years, so you may not earn much more interest, if any, from a notice account.
The biggest benefit of this type of account is therefore the fact that it removes the temptation to withdrawal money on the spur of the moment.
Beware the bonus trap
If you’re opening a savings account, you’re going to want to earn the most competitive savings rate possible, but watch out for short-term bonuses which disappear after the first year.
Plenty of savings providers offer accounts promising bumper returns, but only for the short term. There’s nothing wrong with going for an account with a bonus, but make sure you make a note of when the bonus disappears and move your money then, otherwise you could end up earning paltry returns.
How much are you planning to save?
Savings accounts usually come with a minimum investment limit, but plenty can be opened with just £1. Some, however, require larger amounts ranging from £1,000 even up to £100,000.
As a general rule, the steeper the initial deposit you have to make, the higher the returns are likely to be, so if you are fortunate enough to have a big lump sum to put away, you should focus on accounts with higher minimum investment limits.
A word of caution though – the Financial Services Compensation Scheme (FSCS) only offers protection for the first £85,000 per saver, per banking institution. So spread your savings around if you have a substantial amount to invest.
Remember too that some accounts have a maximum investment limit, so you can’t pay in more than a certain amount.
Should you lock into a fixed rate account?
Some savings accounts, usually known as fixed rate bonds, pay a fixed rate of return for a set period of time. Accounts typically have a one-year term, but you can lock up your savings for as long as five years. And, as you would expect, the highest rates tend to go to savers who are prepared to tie up their cash for longest.
In return for the peace of mind of knowing the interest you are paid won’t fall over time, fixed rate accounts generally don’t allow withdrawals, so this kind of account won’t suit you if you need easy access to your savings. If you have an emergency and do need to close your fixed rate account early, there will usually be hefty penalties for doing so.
If you want more flexibility with your savings, you may prefer to opt for a variable rate account, which will usually allow withdrawals without penalty – though these are not always without restrictions.
With variable returns though, rates can change at any time, so you should always keep an eye on the amount of interest you are earning and move your savings if another account looks more competitive.