Guide to savings account types
Savings accounts come in many forms, but they all have the same goal: to build up a lump sum of money. However, despite all working towards to same end, they get there by different means and what works for one person might not work for another.
Anyone serious about saving needs to have a good overview of the market. This is particularly important at the moment as record low Bank of England base rates make earning a return on savings is harder than ever.
It is essential that people know and understand the differences between the various types of savings accounts to ensure they work with an account that works for them.
Types of savings accounts
As the name suggests, these are savings accounts which offer instant access to your cash. Sometimes called no-notice accounts, it is possible to withdraw money from the account without any restrictions or penalties.
Instant access accounts usually come with a plastic cash card that allows the account holder to take money out of an ATM, while others only offer withdrawals in-branch over the counter.
This type of account is best suited to people that need to have access to their cash, or are using the account as an emergency savings fund. In return for the ease and flexibility an instant access account offers, interest rates are typically very low.
This type of account is almost the complete opposite of instant access as the account holder will need to give the provider anywhere between 30 and 120 days’ notice to withdraw money.
With waiting times of up to four months, it is important that people only lock their money away in a notice savings account if they are confident that they will not need the cash in a hurry. Any emergency withdrawals will likely result in interest being lost.
In return for stashing cash away for at least 30 days – usually longer – notice accounts tend to pay a better rate of interest. However, this isn’t always the case anymore, so it is important to compare notice accounts with instant access before taking the plunge.
The low Bank of England base rate has hit ISAs fairly hard, with the market-leaders still offering paltry rates of interest. However, ISAs have an added benefit over other savings accounts as they are tax-free.
There are currently 4 types of ISAs to choose from, cash ISAs, stocks and shares ISA, Help to Buy ISAs, and IFISAs (Innovative Finance (peer to peer) ISAs)
In the 2016/17 tax year, the ISA personal allowance is £15,240, which can be invested in one type of ISA or a combination of ISAs, so long as the personal allowance is not exceeded.
As the banks and building societies rely on their customers’ money to operate their business, regular savings accounts have become increasingly important. They are designed for people that want to save a fixed amount each month – perhaps a percentage of their wages.
Regular savings account rewards customers that deposit the agreed amount every month by either offering a higher rate of interest or a cash payment.
There are a few things to consider, such as restrictions on cash withdrawals. Some accounts won’t allow any withdrawals until the end of the year when the interest is added, while others put a limit on the number of withdrawals.
These accounts are best for people that are just starting out with their saving and so will be drip-feeding their account rather than investing a cash lump sum. However, by saving regularly, you won’t get paid interest on the entire sum.
Given the poor rates of interest as a whole, fixed bond savings accounts are one of the best options for savers at the moment. Anyone willing to put their money under lock and key for at least 12 months (but up to five years) will get a higher rate of interest.
The way the interest is paid depends on the providers as some will pay annually and others only once the investment matures. Fixed bonds are best for people that are solely dedicated to getting the best possible return on their investment over a prolonged period.
As people are unable to access their money for the term of the bond, they must be confident that they won’t need to use the cash. Emergency withdrawals can be made but it will usually lead to an interest penalty.