People open a savings account for all kinds of reasons, from wanting to squirrel money away for a holiday or a new car to ploughing cash in one to raise a deposit for a house.
The reasons why people save are by-the-by, what matters is that it’s a secure place to put money, often somewhere you can’t easily get at it to spend on a whim.
A savings account provides a safe place for you to put your money so it grows in value, thanks to the interest it earns you. Interest is paid because your bank or building society effectively ‘hires’ your cash until you need it back.
This is important for the account providers because they use the money to let them give other people loans or invest in other profitable ventures. Some of the money is held back to let people make withdrawals as they need the cash.
There are strict rules about how much banks and building societies are allowed to lend out and how much they must hold back for people to be able to withdraw, and even in the worst cases there is a government guarantee that at least £85,000 of your savings will be returned to you if your bank is regulated - no matter what happens.
To attract people to save with them the banks provide a range of savings accounts with different levels of interest rate. In the current climate, the rates are relatively low, but providing you deposit enough money over time, the pennies and pounds will build up.
The government is keen for us all to save, as it keeps the economy buoyant. However, if you save enough for long enough you will face a tax bill.
This is because you have a personal savings allowance that lets you earn a certain amount of interest on your savings before you need to pay any tax, so if you are a:
Basic rate taxpayer you can earn at least £1,000 worth of interest before paying tax
Higher rate taxpayer you can earn £500 worth of interest before paying tax
Additional rate taxpayer you do not qualify for a personal savings allowance
Any interest you earn above your personal savings allowance will have tax deducted at the following rates:
|Basic rate||Higher rate||Additional rate|
Certain savings accounts, Individual Savings Accounts (ISAs), are tax-free, which makes them ideal if you’re likely to end up exceeding your personal allowance.
You can usually open a savings account with at least one other person, or add them to your account at a later date. However, ISAs are only available as sole savings accounts, meaning you can’t open a joint ISA account.
Almost everyone can open a savings account, providing they’re a UK resident with a fixed address.
Most savings accounts are designed for adults, but there is also a selection of accounts for children under 16, including Junior ISAs.
The amount you need to start saving with a financial provider depends on the account you choose. Some banks and building societies require a minimum opening deposit, typically of between £50 and £1,000, but many accounts can be opened with as little as £1.
There are several types of savings vehicles, all with different ways for you to pay in your money and withdraw it . However, the most common options are as follows:
Instant access: an account that lets you add money and take it out at any time.
Notice account: you have to give notice to withdraw money (such as 60 days), or pay a penalty. These accounts usually let you pay in at any time.
Regular saver: an account that requires you to save up to a set amount each month, which is ideal if you do not have a lump sum to save.
Fixed bond: an account that locks your money away for a fixed term, such as one year. These accounts usually come with fixed interest rates for the whole term as you put the whole amount to be saved in when you open it.
Each of these account types is also available when you save using an ISA.
You can save with a current account, but only consider doing so if you find one that pays more interest than savings accounts offer, and you can remain disciplined not to take your money out.
Here are a few reasons why you shouldn’t save your money in a current account:
Lower interest rates compared to savings accounts on most current accounts, and some pay no interest at all. Better paying accounts often put restrictions on how much of your balance they will pay what rate on
You could spend your savings easily: when your money is readily available, you may be tempted to dip in every now and again, which’ll eat away at your savings.
Monthly fees are sometimes applied to high interest paying current accounts.
More vulnerable to fraud: you could lose your money through debit card fraud.
When you save your money through a bank or building society you should check if they are protected under the government's Financial Services Compensation Scheme (FSCS).
This scheme covers your savings up to £85,000 (£170,000 for joint savings accounts). This means you would get your money back if your bank or building society collapsed.
If you want to save more than £85,000, think about spreading your savings across more than one bank or building society. These need to be independent of each other as the compensation scheme will consider two sister banks as being parts of a single entity.
Most savings accounts can be opened in a branch, online or through the post.
To help you figure out which savings account to open, read these pages, which explore how each type works in more detail:
If you want to skip straight to figuring out which account is right for you, read this guide.