Which savings account should you choose?

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Choosing a savings account is not as simple as picking the one with the highest interest rate. Here is how you can get the best account to match your savings needs.
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Investment ISAs put your capital at risk, and you may get back less than you originally invested.

The right savings account for you will depend on your financial circumstances and your savings goals. This guide outlines nine different scenarios and the types of accounts that might be best in each case.

1. If you have debts

If you have debts, such as credit cards or overdrafts, it’s best to focus on paying these off first before you start saving.

This is because your debt will be charging you far more in daily interest compared to what you could earn in a savings account.

This guide explains why you should use your savings to pay off your debt

2. If you want to save without paying tax

Thanks to the Personal Savings Allowance, basic rate taxpayers can earn up to £1,000 in savings interest each year before paying tax. This figure drops to £500 for higher rate taxpayers, while additional rate taxpayers don’t get an allowance. 

However, you can also save on tax by making the most of your ISA allowance. In the 2021/22 tax year, the ISA allowance is £20,000. You can’t carry any of this over into the next tax year, so it’s best to use as much of it as you can afford to.

There are various types of ISA, such as:

Read this guide if you want to learn how ISAs work before you choose

Make the most of your tax-free ISA.

3. If you need access to your money

If you want to be able to access your funds as and when required, you’ll need to choose an instant or easy access savings account as these won’t penalise you for making withdrawals.

If you can give notice before you need to withdraw, such as 60 days, then you could get a higher interest rate by saving in a notice savings account.

You can compare instant access savings accounts here

Or compare notice savings accounts here

4. If you do not need access to your money

If you’re happy to tie up your money for a set term from around six months to five years, take a look at the best fixed-rate bonds.

These accounts usually offer a higher interest rate compared to savings accounts that let you withdraw funds. But remember you won’t be able to access your money during that time without paying a penalty. 

Fixed-rate bonds are also best suited to those who have a lump sum to invest. This is because you won’t usually be able to add to your funds after the initial deposit or the first 30 days.

This guide explains how fixed-term bonds can help you grow your money over the long term.

You can compare fixed-term bonds here

5. If you want to save every month

A regular savings account can help you get into the savings habit as you’ll be required to pay in a set amount each month – say between £25 and £300. 

These accounts typically have a fixed term of 12 months and you can’t usually make withdrawals during that time. If you forget to pay in one month you could also see your interest rate fall as a result.

You can compare regular savings accounts here

6. If you want to save for your child's future

Most banks and building societies offer savings accounts designed to help you grow your money on behalf of your child, tax-free.

There are even children's savings accounts that you can save into until your child's 18th birthday.

Junior ISAs are also available for you to save into on your child’s behalf. The money is locked away until the child’s 18th birthday when they become standard ISAs.

Read this guide for ways you can save for your child

7. If you want to save for retirement

The longer you have until you retire the more you will be able to save, but whether you plan to retire next month or in 40 years there is a savings option that’s suitable for you.

Saving into a pension is one of the best ways to save for your retirement as you’ll qualify for tax relief on your contributions. For example, if you’re a basic rate taxpayer and you pay in £80, this will be topped up to £100 by the government.

If you increase the amount you pay into your pension each month then the income you receive when you retire will also be higher. Read our guide on how pensions plans work.

If you’ve maxed out your workplace pension contributions, you can open a private pension or a Lifetime ISA if you’re aged between 18 and 40.

With a Lifetime ISA, rather than get tax relief, the government adds 25% to the first £4,000 you save each year - although you only get the extra money if you wait until you are 60 to withdraw it or use it to help buy your first home. 

If you have already retired, look for accounts that pay you interest on a monthly basis if you want to increase your income each month.

8. If you want to buy a property

There are several savings accounts designed to help you save towards a deposit on a mortgage.

For example, you can save into a government-backed savings account called the Lifetime ISA, which pays a bonus of up to £1,000 every year if you use the money to help buy your first home.

If you do not qualify for the Lifetime ISA, you can still save into an instant-accessnotice or regular-savings account.

Make sure that you find an account that pays you a good interest rate but also gives you access to your money in case of emergencies.

9. If you want to save for a wedding

You should choose a flexible savings account that lets you pay in and withdraw money without giving any notice.

You can have a savings account in both of your names, which could be the first joint account you hold before getting married.

Read this guide if you have never mixed your finances with your partner before.

This article is designed to offer you impartial guidance as to your options and what they might mean, but the decision on which product to take out is yours.

Maximise the value of your savings by hunting down the best rates available.

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