Guide to savings accounts

1. What is a savings account?

Keeping your money safe

Savings accounts are bank accounts that people use, first and foremost, for keeping excess money safe. They can also be used to put some money aside to get through a future, unexpected emergency or to gather enough money to buy something that is too expensive to pay for in one go.

They have come to replace the traditional saving methods of ‘keeping money under the mattress’ and ‘feeding the piggy bank’.

Your home insurance policy will probably cover a small amount of cash in the event of theft or fire. However, the amount covered by any policy is unlikely to exceed £500 because it would be hard for insurers to know for sure whether you had £1 in your house when it burnt down or £1m. The safest way to keep your money is in a bank because they will keep it in a fireproof, heavy duty, locked safe and will also hold insurance that will cover large sums of money.

The great thing about them is that banks will pay you at the same time as keeping your money safe. It’s a win-win situation.

So, what’s in it for the bank?

Well, the money that savers deposit is used by the banks to lend out in the form of loans and mortgages. The banks charge interest for these services and can so afford to pay you interest for the privilege of borrowing your money and still make themselves a profit.

How are savings accounts different to current accounts?

Banks will offer a much lower interest rate on current accounts compared to that offered on savings accounts. This is because you are more likely to need the money in your current account throughout the month so the bank is less likely to rely on these funds when they lend money in the forms of loans and mortgages.

Current accounts also come with more access options than most savings accounts. You will be able to get a debit card and cheque book with a current account so that you can make purchases in shops without using cash.

Save or pay off debts?

If you have a large sum of spare money you will probably ask yourself if you should save the money or use it to pay off existing debts. It is usually better to clear the money you have borrowed before starting to save. The reason behind this is that you’re likely to be paying a much higher rate of interest on your debts than you will earn on your money if you put it in a savings account.

However, you could use the large lump sum to pay off your debts and then make a deal with yourself to pay the money you would have spent each month on your debt repayments into a savings account from that point onwards.

If you are worried about not having any money for an unexpected event, it might be better to split the large lump sum and pay off some of your debts and also save some in a high interest savings account.

Whatever you choose to do, make sure it is a decision you are comfortable with and one that suits your individual needs.

Savings account regulator

In order to take your money, all Bank and building societies in the UK must be regulated by the Financial Services Authority (FSA).

Savings accounts are usually risk-free in the sense that you will get at least your money back if you decide you have had enough of the account unless the bank or building society collapses.

If this happens, the Financial Services Compensation Scheme may be able to pay compensation to you (up to a set limit), providing the firm is registered with the FSA.

Additionally, most banks and building societies follow the voluntary rules of practice, as monitored by the Banking Code Standards Board (BCSB), called the Banking Code. This is formulated by those that follow it and sets out standards for doing business with you fairly. It also says that banks must give you the right information so that you can choose and run your accounts.

 

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• Next page: Savings accounts and interest rates
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Guide contents

1. What is a savings account?
2. Savings accounts and interest rates
3. Tax and UK savings accounts
4. Opening a savings account
5. Adding money to a savings account
6. Accessing money in a savings account
7. Regular savings accounts
8. Instant access savings accounts
9. Online savers
10. Individual savings accounts (ISAs)
11. Helpful links for further savings information

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