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Is it worth opening a savings account?

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A savings account is an excellent place to start if you want to start saving for the future – whether that’s a holiday six months from now or your first home in five years’ time. Find out more about your options with our five-minute guide.
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Most people use a current account for everyday transactions, from receiving their pay packet to buying groceries and paying bills. 

Some people also keep any spare cash or savings in their current account. 

But while certain current accounts offer high interest rates if you’re in credit, it’s easy for any savings to be eaten up by day-to-day expenses if you keep them in the same place as your spending money.

Opening a savings account allows you to keep your savings separate, giving you a better idea of how much you have set aside and helping you to avoid the temptation to splurge on unnecessary purchases. 

How should I choose a savings account?

The best account to save money will depend on your circumstances, including how much you have to save and what you want to do with the money. 

There is a wide range of different types of accounts. Options include:

  • tax-free cash ISAs

  • fixed-rate accounts – these generally involve locking your money away for between one and five years

  • regular savings accounts – these require you to make monthly instalments, usually over a 12-month period

  • stocks and shares investments – these are worth considering if you are saving for a long-term goal 

This guide explains the different types of savings accounts available and explores how to make the most of your savings, whatever your plans.

What are the best savings accounts?

The best savings account for you will depend on how you want to save and what level of access you need to your savings.

The aim is to earn the highest interest rate possible, but most top accounts come with terms and conditions regarding how much you pay in and when you can withdraw your cash.

Here’s our round-up of the various pros and cons of the different accounts available.

Regular savings accounts

Regular savings accounts generally run for 12 months, during which time you agree to pay in a certain amount – somewhere between a minimum of say £10 and a maximum of around £250 – each month.

The interest rates on accounts of this kind are fixed for the 12-month term and are usually higher than those paid by easy access or fixed-rate savings accounts. 

However, you will face penalties if you miss a monthly payment or need to withdraw your money before the term ends.

Pros 

  • High-interest rates make these accounts a good place to save smaller amounts

  • They encourage saving by requiring you to make monthly payments and penalising you for withdrawals 

Cons

  • You’ll generally lose interest if you miss a payment or withdraw money within the term

  • You can only use most accounts to invest up to about £250 a month

Easy-access savings accounts

Easy-access savings accounts offer instant access to your money, meaning you can make a withdrawal whenever you need to without worrying about penalty fees. 

Most accounts of this kind also allow you to pay in as much as you want when you want – up to a maximum of, say, £250,000. The downside is that they usually pay much lower rates than you can get with fixed-rate or regular savings accounts. 

In fact, some current accounts pay higher interest rates on in-credit balances up to a certain amount. As easy-access savings accounts generally pay variable interest rates, you also need to keep an eye out for any changes.

Pros

  • You can pay in and withdraw money whenever you want

  • You can often open them with as little as £1

Cons

  • They pay lower interest rates than other types of savings accounts

  • They can become even less competitive over time

Fixed-rate savings accounts

Savings accounts of this kind pay a fixed interest rate for a set period, usually one, two, three, four or five years. They can be used to save significant amounts and the interest rates available are generally higher than you can earn in an easy-access account. 

However, you could lose out if interest rates rise during the account term. You’ll also have to pay a penalty if you need to access your money within the term.  

Pros

  • Locking your money away removes the temptation to spend it

  • You will earn a higher rate of interest than with an easy-access account

Cons

  • You will be penalised if you make a withdrawal before the term ends

  • You may end up on an uncompetitive rate if interest rates rise during the term

Cash ISAs

A cash ISA is a tax-free savings account. You can use them to save up to £20,000 each tax year – making them a good choice if you risk earning enough interest on your savings to exceed your personal allowance. The allowance currently stands at: 

  • £1,000 for basic-rate taxpayers

  • £500 for higher0-rate taxpayers

  • £0 for additional rate taxpayers

Cash ISAs can pay either variable or fixed interest rates. Terms and conditions vary between the various accounts available.

Pros 

  • Cash ISAs offer tax-free interest

  • You can transfer them without losing the tax advantages if you find a better deal

Cons 

  • You can only use these accounts to invest up to £20,000 per tax year

  • Any money withdrawn will generally count towards your annual ISA allowance

When should I switch savings accounts?

It’s a good idea to switch savings accounts if the interest rate you are being paid is lower than you can find elsewhere. 

Switching is easy – your new account provider should arrange the transfer of your balance and redirect any regular payments into the account. 

Just remember to check the terms of your existing account – if there is a penalty for switching within a certain time it may be worth waiting until you can transfer your savings without paying a fee. 

If you are transferring a cash ISA, it’s also important to ensure the balance is transferred directly to the new account provider, as withdrawing the cash will mean losing the tax advantages – even if you pay it straight into another ISA.