A savings account is an excellent place to start if you want to start putting away money 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.
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. Other accounts pay minimal interest, meaning even if you do leave your money in there, it won’t be growing.
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.
Yes, interest rates have been rising steadily for the past few years.
The Bank of England increased interest rates to 5.25% in August 2023, the 14th consecutive hike since December 2021. This means that interest rates are at their highest level since 2008.
Experts are predicting that at least one further rise is ahead, with the BoE expected to increase the UK base rate of interest to 5.25% in August. Some are predicting yet more rates before the end of the year.
In theory, as the Bank of England increases interest rates to battle inflation, this should mean that savings rates rise too.
However, so far the banks have been slow to pass on base rates to savers. While interest rates on savings accounts are significantly higher than they were even a year ago, they are still languishing behind the rate of inflation.
Inflation measures how much the cost of goods and services is rising. If your savings are earning less than inflation, then the value of your money is eroded over time. While the pound amount is rising, the amount you can buy with your money is rising more quickly, so you are worse off overall.
For short and mid-term savings, inflation is less of an issue, but over the longer term you might want to consider well diversified investments to try and outperform inflation.
The best account to save money will depend on your circumstances, including how much spare cash you have 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 – these are useful if you’re likely to earn more than your personal savings allowance but tend to have lower rates.
Easy access accounts – these allow you to save money and make withdrawals whenever you want, but typically offer lower interest rates than fixed term options.
Notice savings accounts – to access your money you’ll need to give notice, such as 30, 60 or 90 days. In return you generally get a higher rate than with an instant access option.
Fixed-rate accounts – these generally involve locking your money away for between one and five years in return for higher interest rates. Typically the longer the term, the better the rate.
Regular savings accounts – these require you to make monthly instalments, usually over a 12-month period. Some current accounts offer high interest regular savers to their customers as a perk.
Stocks and shares investments – these are worth considering if you are saving for a long-term goal, but there are risks.
This guide explains the different types of savings accounts available and explores how to make the most of your savings, whatever your plans.
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 generally run for 12 months, during which time you agree to pay in every month. For example, the bank or building society may say you need to save between a minimum of £10 and a maximum of around £250 each time.
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 may face penalties if you miss a monthly payment or need to withdraw your money before the term ends. Some banks will allow you to make a set number of withdrawals before getting a penalty.
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
You’ll generally lose interest if you miss a payment or withdraw money within the term
Each provider will have a maximum amount you can save, for instance £200-£400 a month
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.
They pay lower interest rates than other types of savings accounts
The rate can go down as well as up
They pay lower interest rates than other types of savings accounts
They can become even less competitive over time
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.
Locking your money away removes the temptation to spend it
You will earn a higher rate of interest than with an easy-access account
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
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:
£5,000 for people who don’t earn enough to pay income tax
£1,000 for basic-rate taxpayers
£500 for higher-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, and you can get easy access, fixed term and notice account ISAs.
Cash ISAs offer tax-free interest
You can transfer them without losing the tax advantages if you find a better deal
You can only use these accounts to invest up to £20,000 per tax year
Some accounts say that money withdrawn will count towards your annual ISA allowance
These accounts are a good compromise between fixed term savings accounts and easy-access options. When you sign up, you agree to give a certain amount of notice before withdrawing the cash.
The period varies by product, but some typical lengths are 30, 60, 90 or even 180 days. If you need the money and can’t give the notice, you’ll face penalties which can be costly.
Better interest rates than easy access accounts
You can access your money as long as you give notice
Generally worse rates than with fixed-term savings accounts
If you need your cash urgently, you will have to pay a penalty
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.
As interest rates are rising, the cost of borrowing is also increasing significantly. Banks tend to put up the interest rates on loans and new mortgage products quickly whenever there is a Bank of England base rate rise. Unfortunately, savings tend not to rise as quickly or as much.
If you have expensive debts, you may be better paying these off more quickly, rather than saving money. The trick is to compare the interest you’re paying with the interest you would earn saving.
For instance, if you have a credit card charging 20% interest, that will cost you £20 for every £100 of debt. If your savings account is paying just 5%, you’ll only earn £5 for every £100 you save. So, you’ll be better off overall paying down the debt.
One exception is if you have a 0% interest credit card. Here, you might be better off putting the money into a savings account, as long as you can still make the minimum payments on the card. At the end of the term, you can use your savings to clear the debt and pocket the interest you earned. You need to make sure you have enough set aside to clear the debt at the end of the term, or you could get stung by high rates.
With some kinds of debt, it’s important to check the terms and conditions carefully. Mortgages and loans often charge you a penalty if you repay early, so you might be better off saving until you’re out of the penalty period or until the charge is sufficiently small.
If your mortgage does allow you to overpay, check your rate. If you’re still locked into a cheap fix, you may find you’re better off saving then using the cash to pay a chunk off at the end of the term.
If you’re saving for a long-term goal, that is more than five years away, you might want to consider investments instead. Because savings account interest rates are lower than inflation, your money is devalued over the long term. Over the long term, well chosen investments typically offer a better return.
If you do choose to invest, you want a well-diversified portfolio that is spread across different types of asset, markets and companies.
However, there are risks. Investments are volatile, which means that they rise and fall. That’s why it’s important that investments are long term, so you can ride out stock market volatility. They’re also complicated, which is why it’s worth considering managed accounts where an expert makes decisions for you.
If you’re considering investing, read our guide to get started, and consider speaking to an independent financial adviser (IFA).