Choosing a savings account can feel like comparing tins of beans with slightly different labels. There are dozens of names, rates that change all the time and small print about withdrawals. But once you know what the money is for, it becomes easier to see which types of account are designed for that purpose.
So rather than starting with the accounts, this guide starts with what the money is for, and explains which type of account is designed for each purpose.
Money you might need at short notice: easy access accounts
Your emergency fund needs to be there the moment the car fails its MOT or the boiler packs in. An easy access account lets you take money out whenever you like, usually without losing interest. Rates are normally variable, so they can go up or down.
Watch for accounts that only allow a few withdrawals a year, or that pay a lower rate if you dip in. And check whether a tempting headline rate includes a bonus that drops off after twelve months. If it does, it is worth noting when it ends so you can review the rate.
Money for a known cost later on: notice accounts and fixed-rate bonds
If you are saving for something with a rough date attached, like a holiday next summer or a deposit for a new tenancy, you may be able to earn more by giving up some flexibility.
- Notice accounts ask you to give a set amount of warning, such as 30 or 90 days, before you withdraw. They are designed for money that will not be needed in a hurry.
- Fixed-rate bonds lock your money away for a set term, often one to five years, at a rate that will not change. You usually cannot take it out early or add to it once the account is open.
Because the money cannot be reached during the term, these accounts are generally used only for money people are confident they will not need. If you are planning for yearly costs, our guide to expense planning explains how to work out how much to put aside.
Money you are building up month by month: regular savers
Regular savings accounts let you pay in up to a set amount each month, usually for a year. They often show eye-catching rates, which many people find helpful for building a habit. Just remember that the rate only applies to the money while it is in the account. Because you are paying in gradually, the interest you actually earn over the year is roughly half what you might expect from the headline rate on the full amount. Some also require you to hold a current account with the same bank.
Saving for the long term: ISAs and the Lifetime ISA
An ISA (individual savings account) lets you save or invest without paying tax on the interest or growth. Cash ISAs come in easy access, notice and fixed-rate versions, just like normal accounts. There is a limit on how much you can pay into ISAs each tax year, which is shared across all the types you hold. GOV.UK explains the current rules.
A Lifetime ISA is aimed at people saving for their first home or for later life. You can open one between the ages of 18 and 39, and the government adds a 25% bonus to what you pay in, up to an annual limit. The catch is that if you take the money out for any other reason before you turn 60, there is a withdrawal charge, and you can end up with less than you put in. There is also a price limit on the home you buy. GOV.UK has the full details.
Even outside an ISA, most people can earn some interest tax-free thanks to the Personal Savings Allowance. The amount depends on your income tax band.
If you get Universal Credit and meet the work and earnings conditions, you may be eligible for Help to Save, which adds a government bonus to what you put away.
Is your money safe, and how do you compare rates?
Check that the bank or building society is authorised in the UK. Savings with authorised firms are protected by the Financial Services Compensation Scheme (FSCS) up to a set limit per person, per banking licence. Some brands share a licence, which is worth knowing if you hold large sums.
When comparing, look at the AER (annual equivalent rate). It shows what you would earn over a year, including the effect of interest being added, so you can compare accounts fairly. With prices rising, the rate you earn affects what your savings are worth in real terms, as our guide to what rising prices mean for your budget explains. This article is general information, not financial advice. MoneyHelper has free, impartial guides to saving and help with your own situation.
