A Look At Savings Accounts

For those that have managed to put some money aside, savings accounts are a great way to look after your money, and earn some more on top of what you have saved. Moolr have looked at some of the commonest types of accounts on the market.

What is a savings account?

For those who have disposable income, a savings account is an excellent way to look after your money. Banks and building societies offer modest interest on savings accounts, a percentage of the money in the account. This lets you build up your savings further. The savings account provider may set a minimum amount that needs to be deposited in such an account. However, iit is usually quite low – it will vary depending on the specific terms of the account.

Savings accounts are not designed for storing money that you intend to withdraw and use on a daily basis. Instead they are designed as somewhere to put funds as an investment. Hence, this is why there is an interest rate that is generally not available on a normal current or debit account. An active account allows you to see a return on your savings and also keep your money protected by the bank.

What are the main types of savings accounts?

There’s a wide range of savings accounts available in the current market, all with different advantages and disadvantages. When comparing what is on offer, it is important to understand the differences between the types of savings account. This allows you to choose an account that perfectly serves your individual needs.

Individual savings accounts

Individual Savings Accounts, commonly known as ISAs, pay you a set interest rate on the value of your savings. ISAs were introduced by the Government in 1999 and operate similar to typical savings account but with a tax incentive.

Income generated from a savings account is taxed at numerous rates from 10% to 45%. Paying tax can make returns from a savings account less rewarding. However, with a cash ISA, you can keep £15,000 of savings per year without having to pay cash, specifically income and capital tax on the interest earned. For those with significant savings, suffering from a high tax bracket, this is certainly an advantageous scheme.

What’s more, due to recent law changes, using an ISA is much simpler than it used to be. You can invest money, stocks, shares or a combination of the three in an ISA. Any UK resident over the age of 16 is eligible to open a cash ISA. However, in order to make use of the stocks and shares component of an ISA you must be over 18.

Regular savings accounts

A regular savings account requires you to make minimum monthly deposits of £50 to £250 and you can receive a higher interest rate than other typical accounts. Usually lasting 12 months, a regular savings account may offer the best return of up to 10%. This is provided you are able to afford the monthly deposits.

As you may expect however, regular savings accounts come with certain restrictions, as they do not operate like a typical current or debit account. You will be limited to the number of withdrawals you can make, with some policies lasting for long periods. Also, some banks may only offer such accounts to existing customers. Thus, you would have to have two accounts with the bank – a current and savings account.

Other Considerations With Savings Accounts

Adding a partner to an account may make you eligible for higher rates through a Joint Regular Savings Account, so tread warily. It is also possible to open an account in your child’s name.

Also beware of missed monthly repayments because missing just a single repayment could cause the bank to drop your interest rate from 8% to 1%. Be sure to check the terms and conditions to see if there is a payment holiday available. Try and stick to the terms of your account at all times to receive the full benefits.

Fixed rate bonds savings accounts

If you want an account in which to deposit savings without needing access to the money, then this could be a suitable account for you. With interest rates at record lows (at the time of writing it is set at 0.5%), people are looking for alternative ways to make income from spare money. Fixed rate bonds are an effective way of doing this. You get higher interest rates in return for “locking away” your money for up to 5 years. The interest rate is also fixed, so it is an account that offers stability, and is not affected by market forces or Bank of England decisions.

However, there are disadvantages to such an account apart from lack of access to funds. A stable rate can be advantageous, but could also prove costly if interest rates increase during the account’s life.

There are many different types of fixed rate accounts. It is a good idea to make use of a fixed a rate ISA if you are determined to open a fixed rate account. You are able to benefit from the £15,000 in tax allowances that they offer.

Instant Savings Accounts

If you require access to funds and the flexibility to do as you please with your money, then an instant access savings account may be the best savings account for you. As the name suggests, with this account you can withdraw money without any hassle. However, as you’d expect there is a pay-off for this flexibility. This is lower interest rates than the other savings accounts.

Instant access savings accounts tend to offer higher interest rates for limited periods. With a bit of effort, extra money can be made from your savings. You do this by moving your funds around to benefit from different bonuses. As is often the case, the best offers are available for new rather than existing customers.

Tips for getting high interest rate savings accounts

The rate of interest paid by a savings account is the first thing people tend to look for when deciding which account to take out. This interest can be paid monthly or annually, depending on the terms of the account. Many savings accounts will incur taxation on savings. However, some accounts, notably ISAs, allow you to save up to a certain threshold without paying tax. For the 2017/18 tax year, this threshold for ISAs was £20,000.

As mentioned previously, it can also be beneficial to take advantage of opening offers for new customers on these accounts, which would normally consist of a higher rate of interest for a limited period.

When choosing an account that does not allow instant access to your money, be fully confident that you are in a position to “lock away” savings. This would be in an account for a certain amount of time without access. It is not worth suffering financial difficulties in order to gain a higher rate of interest.

Relying on interest rates as a form of income

Some savings accounts will pay your interest to you on an annual basis. Some accounts pay on a monthly basis. You should utilise the option that best suits your individual needs – some accounts will give you the choice.

Online savings accounts

Many bank accounts can be operated online allowing you to monitor your funds at any time. All the high street banks have an online mobile site or app, which allows you to check your progress and receive regular updates, make adjustments and more.