Savings Accounts Guide

Savings Accounts Overview
Savings Accounts Types
Savings Accounts: Interest & APR
Savings Accounts Charges
How to Choose Savings Accounts
 

Savings Accounts Overview

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Savings can be defined as money that we have set aside for the future - perhaps for a big purchase, a special occasion or a rainy day and an as-yet-unknown expense. This might be money that we need to get at quickly and at short notice - and we need to know that we're going to get back every single £1 saved (plus a bit of interest on top).

• Bank savings accounts - banks and building societies offer a wide variety of different accounts. Current accounts offer instant access and flexibility, but generally pay very poor interest. On the other hand, the huge number of specialist savings accounts offer limited extras, but far better interest rates.
  
  
• I SAs - tax efficient wrappers that can be used to hold many different types of savings and investment products. A mini-cash ISA is, as the name suggests, a cash savings plan for up to £3,000 savings per year that does not incur any tax on the interest paid.


• National Savings & Investments - savings products and investments issued on behalf of the government. They come in many shapes and sizes, with some designed for people seeking income and others providing growth.
  


• Credit Unions - financial co-operatives owned and controlled by the members of a group - perhaps people from a specific area, working for the same employer or belonging to the same trade or church association.
  Savings are different from investments - investments are for the longer term and are for money that you can afford to tie up for five years or more. And it's important to remember that if an investment performs badly there is no guarantee that you will get all your money back.

• Instant & Easy Access Accounts - the most common form of savings account, usually requiring a very low minimum investment and suitable for anyone needing to get at their cash at short notice.
  
  
• Notice Accounts - accounts requiring you to give notice before withdrawing money from your account - typically 7, 30, 60, 90 or 120 days and sometimes even 1 year. These accounts usually offer better interest rates, but with restrictions on gaining access to your money - or penalties if you withdraw money without giving notice.
  
  
• Bonds or Term Accounts - these are high interest savings accounts that tie up your money for a fixed length of time - usually between 1 and 5 years. These accounts pay the highest available interest rates, but the cost is that you can't get your money back until the end of the fixed period.
  


• Regular Savings Accounts - accounts requiring regular monthly contributions. These accounts can offer impressive headline rates, but come with heavy restrictions and penalties for failure to observe them - including minimum & maximum deposits, maximum number of withdrawals, etc. If an offer seems too good to be true, then it probably is - check the small print very carefully!
  

• Gross Interest is the amount paid on your savings before income tax is deducted,
  
  
• The Annual Equivalent Rate (AER) is a comparative rate used to show the amount of interest that you are likely to be paid over one year, taking into account the effects of payment dates and compound interest.
  
  
• Interest rates - not only do interest rates vary from one account to the next, but some premium and foreign currency accounts will only pay interest on a minimum balance. Most high street current accounts only pay 0.1% per annum, whereas some 'instant access' accounts will pay up to 5%.
  
  AER Example
  
  Savings accounts usually calculate the interest due on your account daily, but vary in how often they will actually pay this interest - it can be monthly, quarterly, half-yearly or at the end of a full year.
  
  Assuming that gross interest of 12% is paid monthly on a £100 balance, you will receive 12% / 12 months = 1% every month:
  
  
• £1 at the end of month one (1% of £100), 
• £1.01 at the end of month two (1% of £100 +£1),
• £1.02 at the end of month three (1% of £100 +£1 + £1.01)
• £12.68 interest by the end of month 12 - giving an Annual Equivalent Rate of 12.68% on your savings.
  

• Withdrawing money without giving the required amount of notice,
  

• Closing the account before the end of a specified period - very common on the Regular Saver and Term Accounts,
  

• Depositing less than the stated minimum amount required for the year - most important on the Regular Saver accounts,
  

• Making more than the allowed number of cash withdrawals per month/ year.
  

• Access to your account - branch, telephone, post, ATM card or Internet? Some of the best interest rates are only available over the Internet, as the provider has far lower overheads to take into account. However, this is obviously irrelevant if you don't have access to a secure pc!
  
  
• Notice period - it is often very useful to have a 'rainy day' fund that you can access at very short notice. But if you already have sufficient funds put by for an emergency, then you might want to consider a Notice or Term Account to access the best interest rates.
  
  
• Minimum deposit required - some of the best interest rates are only available to savers with a larger cash balance.
  
  
• Account restrictions - if you think you may need to access your money at short notice, beware of accounts with strict limitations and restrictions.
  
  
• Special offers - beware of offers which look too good to be true, as they probably are - unless you are prepared to play by their rules and change accounts when the special offer ends.