Find out everything you need to know about how savings accounts work and what to consider when choosing an account. The best interest rates available differ among providers and depend on a variety of factors.
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During the ongoing COVID-19 pandemic, times are hard for savers, with historically low interest rates drawing comparisons to the financial crisis of 2008. In March 2020, the Bank of England cut the base rate twice, from 0.75% to 0.1%, the lowest in the UK’s history.
While times are tough, you’ll probably want to make the most of the best rates you’re eligible for, with an account that suits how you want to access and run it.
It’s estimated that 11.5 million UK adults have less than £100 in savings, according to the UK Strategy for Financial Wellbeing 2020-2030 report published by the Money and Pensions Service in January 2020, while nine million people borrow money to pay their monthly bills. But it’s not all bad news.
The same report has set a target of creating a ‘Nation of Savers’, increasing the number of monthly savers from 14.7m to 16.7m by 2030. If you’re someone who’s already saving, or looking to take greater control of their financial future, you’ll want to be clever with your money by putting it in the right savings account. Here’s our guide on how to avoid pitfalls and compare savings account rates.
What is a savings account?
A savings account is a type of bank account where you put money that you don’t need to spend immediately. You deposit money with the bank and get paid interest in return for saving with them.
Savings accounts are simpler than current accounts, which are designed for everyday banking like paying bills. For example, you can’t have an overdraft with a savings account. A savings account is there for you to put money away safely so it’s available when you need it. It can help you build up a lump sum, and earn you interest on money that you don’t need right now, for other things.
What types of savings accounts are there?
While not an exhaustive list of options, below are the main types of savings accounts out there.
Instant access savings accounts
Instant access accounts let you withdraw money when you need it, so they’re a good place to save for emergencies. Interest rates can vary over time.
- Instant access - pay in or take out money whenever you want.
- Interest rates (Annual Equivalent Rates - AER) are usually lower than fixed term accounts.
- Good for when you need cash savings in an emergency and short-term savings.
- Interest taxed only after personal savings allowance limit is reached. (You won’t pay tax on the first £500 to £1,000 of interest earned, depending on your tax band.)
If you know you won’t need the money for some time, a fixed rate savings account, also known as fixed rate bonds, give you the certainty of knowing how much interest you’ll get in total. The rate of interest is set for the whole term, but you’ll need to be sure you can afford to tie your money up, as it’ll be locked in for the term’s duration.
- Leave your money for a fixed term (usually 1-5 years).
- If you want to access the money early, you’ll usually pay a penalty; early access is not possible for some accounts.
- Interest rates (AER) are usually higher than with instant access accounts.
- Good for medium-term savings.
- Access at the end of the fixed term.
- Interest taxed only above personal savings allowance limit.
Regular savings account
With this kind of account, you save the same amount every month. They often pay among the most favourable interest rates, but there are usually rules about how much you can put in and take out
- Save a set amount each month.
- Interest rates (AER) are usually higher than for instant access accounts.
- Typically, you need to keep up the regular payments to benefit from interest.
- Good for building up a savings pot.
- Access varies.
- Interest taxed after personal savings allowance.
ISAs Individual Savings Accounts were designed by the UK Government to encourage long-term saving. You don’t pay tax on any interest earned, and there’s a limit on the amount you can pay in every year.
- You can pay in up to your ISA allowance each year (the limit is £20,000 for the 2020-2021 tax year, which ends on 5 April 2021).
- You must be 16 or over to open a cash ISA.
- There’s no tax to pay on any interest earned.
- Can be instant access or fixed term.
- Access varies.
- You must be resident in the UK to open an ISA.
- You can’t get a joint ISA account.
Children’s savings accounts
Children’s savings accounts are basically the same as adult accounts. If you’re looking to give your child a head start for when they’re older, you can set up a standing order to make a regular deposit each month. But please note, currently, you can’t compare children’s savings accounts with us.
Saving as little as £10 a month from when they’re born can provide them with a gift of at least £2,160 on their 18th birthday – and that doesn’t even include the interest earned over that full period
- Children's saving accounts can be opened for any child under the age of 18
- The child can only use the account themselves from the age of seven
- Money gifted from parents, that earns interest (AER) over £100 a year, will be subject to tax
- Children have a personal allowance for income tax, which is £12,500 for the 2020/21 tax year. As long as any income and interest they earn doesn’t exceed the personal allowance, there will be no tax to pay.
Junior Individual Savings Accounts (JISA) are long-term, tax-free savings accounts for children. They're are set up by parents or guardians who manage the account until the child turns 16, even though the money, which can’t be accessed by the child until they turn 18, legally belongs to the child. You currently can't compare these with us.
- You can pay in up to the child’s ISA limit per year (£9,000 for the 2020-2021 tax year).
- There’s no tax to pay on any interest earned.
- The money belongs to the child.
- They can only access the money when they turn 18, but they can manage the account from 16.
- Good for saving for your child’s future.
An ISA aimed at younger people to help them save, either for a home or for retirement, with a special bonus paid by the Government to bump up the value of savings.
- Available if you’re aged 18-39.
- Pay in up to £4,000 per year until the age of 50. The Government will add an extra 25%.
- There’s no tax to pay on any interest earned.
- If you withdraw money early you usually pay a 25% penalty. (But the penalty has been lowered to 20 per cent until 5 April 2021. The move was made to help people who need early access to their savings due to the COVID-19 pandemic.)
- Good for saving for later life, retirement or your first home.
- Access either at age 60, or when you buy your first home or if you’re terminally ill with fewer than 12 months to live.
The Lifetime ISA limit of £4,000 counts towards your annual ISA limit. So, you can hold a Lifetime ISA alongside a cash ISA, or stocks and shares ISA.
A notice account is a kind of mix between an easy access and fixed-rate savings account. It allows you to access your money, but you’ll need to give notice before doing so. Depending on the provider, this can generally vary between 30 – 120 days or more. Notice accounts tend to offer a better interest rate than easy access accounts, so if you know exactly when you plan to withdraw your money, it could work well for you.
- Can offer better AER rates than standard savings accounts
- You must notify your account provider before making a withdrawal
- Notice period can range anywhere between one and six months
Which type of savings account is best for me?
Only you can decide what account is best for you and your circumstances – and it may be you need more than one savings account. For example, you might need an account which you can take money out of quickly, as well as an account to put money away and save for your longer-term goals.
Here are some questions you should ask yourself when considering a new savings account:
- How much money do you have to save? Some accounts pay different rates of interest depending on how much you save. Usually, the more you have saved, the higher the interest, so check out your options. If you have more than £85,000 in savings and deposits, it could be worth splitting it between different accounts and banks with different banking licences. That way you’ll be protected by the Financial Services Compensation Scheme (FSCS) if your bank goes bust. Some international banks may be protected by their own country's scheme. See more on keeping your savings safe.
- Do you have a rainy day fund? The independent Money Advice Service says a good rule of thumb is to have around three months of essential outgoings in an instant access savings account. Think about how much you spend every month on mortgage or rent, bills, food and other essentials, then multiply that by three. You should put this emergency fund money in an account where you can get hold of it quickly when you need it.
- Do you need access to your money? For the most part, easy access accounts let you make withdrawals whenever you want, but some may limit the total number of withdrawals you can make in a year, so always check first.
- Can you put your cash away for longer? Fixed-rate accounts could pay higher interest in return for keeping your money in an account for a set period of time. If you take your money out sooner, there can be high penalties and you could miss out on higher interest rates if they rise during the savings term. You can save regularly into other kinds of accounts too, so weigh up your options.
- Do you want to add to your savings every month? Regular saver accounts are designed to let you save around £200 to £500 a month – the maximum you can save varies between providers. They can pay higher interest rates than other accounts, but some only apply for a year and then you’ll have to move your money elsewhere. Others will let you continue to build your funds.
- Do you pay tax on your interest? Your personal savings allowance means you won’t pay tax on the first £500 to £1,000 of interest accumulated, depending on your tax band. Alternatively, the interest you earn on an ISA will be totally tax-free.
- Are you saving for a deposit as a first-time buyer? Consider One option is to opening a Lifetime ISA to earn a 25% bonus on your savings if you’re a first-time buyer aged 18-39 inclusive. You can’t use these savings without paying a withdrawal penalty, unless you’re buying a house, or using the money for retirement from the age of 60, or you’re terminally ill with fewer than 12 months to live.
- Do you want to save for your kids? If you have children under 18, you can save money for them. For example, with a Junior ISA you can lock money away until they are 18, which they could then use to help pay for university, or their first car, or even as a deposit on a home.
- Is saving the best use of your money? Would you actually be better off paying off your debts or overpaying your mortgage, than saving? Remember, interest rates on debts and mortgages are usually higher than what you can earn on your savings, so saving could represent a false economy.
- Do you have a particular savings goal? Are you saving for the holiday of a lifetime, a wedding, or a new car? You may want to separate these savings from other funds, to help you see how close you are to your specific goal.
- How hands-on do you want to be? Some providers tempt savers in with a high bonus rate for a fixed period, which then drops significantly. If you’re confident that you’ll remember to switch accounts when the bonus rate falls, then you could choose one of these. If you don’t have time to keep switching, you may prefer to choose an account that offers a stable, decent rate of interest.
Why compare savings accounts?
When choosing a savings account, you want to get a good interest rate – along with the features you need to manage your finances. With so many providers out there, you have a lot of options to choose from to find the best savings account to suit your needs.
At Compare the Market, we make it easy to compare savings account rates by gathering information from dozens of accounts in one place. You can see the rates available and key information at a glance – including pros and cons, maximum and minimum balance, and the ways you can manage your account.
Frequently asked questions
How has the coronavirus pandemic impacted savings?
In response to the COVID-19 pandemic, the Bank of England cut its base rate to the record-low 0.1% to help people with the cost of their mortgages and loans. While this has been welcome news for borrowers, it’s not so great for savers. Unfortunately, a lower base rate means lower interest on your savings.
To help customers who may need early access to their savings, many banks and building societies are being more flexible with their access rules to savings accounts.
Find out more about Savings and coronavirus.
What should you consider when you compare savings accounts?
- Interest rate vs access – most easy access accounts offer a lower interest rate than other savings accounts, while the higher interest accounts typically have restrictions on when you can access your money.
- Minimum and maximum deposit – some accounts can be opened with just £1, while others may need you to deposit much larger sums. Some savings accounts will also have a maximum balance. A number of accounts offer tiered rates of interest, so the amount of money you have in the account can affect your rate of interest.
- Tax – an ISA should help you maximise your tax-free earnings.
- Protection – make sure your savings are protected by the Financial Services Compensation Scheme (FSCS), so you know you'll get most of, or all of your money back, if the organisation fails.
If you've only got a small amount to save, some current accounts will pay higher rates of interest on balances up to a certain level, so these may be worth considering over savings accounts. But you'll need to be disciplined and make sure you don't spend the cash in your account. It might be worth opening a savings account, too.
Who can open a savings account?
If you want to open an ISA, you’ll need to be a UK resident or a crown servant (for example a diplomat, their spouse or civil partner).
Other than that, it’s up to each account provider to set their own rules. There might be age restrictions, so you may have to be 16 or 18 for some types of account, and some banks may reserve their best-paying savings accounts for customers who have a current account with them.
Some small building societies may restrict their accounts to people who live in their area. For example, the Ipswich Building Society only offers its savings accounts to existing members or people who live in its local postcode areas.
Make sure you check the eligibility rules for any account you’re considering.
Can I open a joint savings account?
Yes, most savings accounts are also available as joint accounts, although some providers may require one of you to be an existing customer first.
You can’t, however, open a joint ISA. That’s because it’s an Individual Savings Account intended for one person only.
How do savings accounts work?
Savings accounts are offered by banks, building societies and credit unions, and can also be offered by friendly societies and other financial institutions. Traditionally, banks use the money they hold as savings to lend to other people. They make a profit on the difference between what they charge for the loan, and what they pay you in interest.
Interest is what you pay for borrowing money, and what banks pay you for saving with them. For example, if you choose an account that pays 2% AER interest and you deposit £1,000 for a year, at the end of the year you’ll have £1,020.18 – your original deposit of £1,000 plus £20.18 in interest. If the interest was only 0.1%, you would only earn £1 on your money. That’s why it’s important to find the best rate of interest for a savings account that suits your needs.
What really makes a difference over time is the effect of compounding. This is when you earn interest on the interest that has been added to the account.
Take a look at our example below. You can see how the value of the savings deposited builds up over time. In the example, you start with a deposit of £5,000 and don’t make any additional payments, but just leave the interest (at a rate of 2%) in the account. In year five, you’re earning roughly £10 more a year, thanks to interest on your interest:
|Year||Year’s interest (compounded monthly)||Total interest||Balance|
Compounding also explains why, if you have a loan or debt, the longer you take to pay it off, the more you’ll pay in interest.
Banks can afford to pay interest because typically they charge higher rates to borrowers than they pay to savers. If a bank charged the customer 5% interest to borrow £100, the bank would earn £5, then pay part of that profit as interest to savers in return.
Do I have to pay tax on the interest my savings earn?
It depends on the type of savings account you have and how much you’ve saved in total. There are two types of savings accounts – taxed and tax-free. An ISA is a tax-free account.
Interest from other types of savings accounts counts as income, and how much tax you pay depends on how much interest you earn. Most people will earn all of their interest on savings, without paying any tax at all. That’s because you get a personal savings allowance of £1,000 interest tax-free if you’re a basic rate taxpayer, or £500 if you’re a higher-rate taxpayer.
You’ll pay tax on any interest over your allowance at your usual rate of income tax. That’s 20% for basic taxpayers and 40% for higher-rate taxpayers.
For more detail see tax on savings interest at GOV.UK.
How can I be sure my savings are safe?
Make sure your savings are in an account that is protected by the Financial Services Compensation Scheme (FSCS). This scheme applies to all banks and financial organisations that are regulated by the Financial Conduct Authority (FCA). Most deposits up to £85,000 are protected if the authorised bank or financial firm goes under.
I have debts. Should I pay those off before I start saving?
If you have outstanding credit card debts subject to high rates of interest, it might be advisable to pay those off first, before thinking about putting money away. That’s because you’ll almost certainly be paying a higher rate of interest on debts like loans and credit cards than you’ll be earning in savings interest. Once you’ve cleared your debts, you’ll have more money and can save faster.
If, on the other hand, you’re paying off your credit card in full every month and keeping up your mortgage payments for example, it might be a good time to start saving.
How much should I be saving?
Start by making sure you have at least three months’ worth of essential outgoings in an emergency fund. And get yourself into the savings habit by setting up a standing order or Direct Debit into a savings account.
Work out how much money you can save. You can potentially have more spare money by regularly reviewing your bills and making sure you’re not paying more than you need to, for services and resources like gas, electricity, phone, broadband and insurance. For example, you might be able to save £228** on your car insurance and £104*** on home insurance by getting a better deal.
According to the Money Advice Service, it makes sense to save up a minimum of 10% of your earnings every month, or whatever you can afford.
But remember, before you start putting all your spare money into savings, you need to think of your long-term plans and goals, particularly your pension. As well as growing your savings, you may want to increase your pension contributions, or set up a pension if you don’t have one already. As with any financial investment, we’d always recommend seeking independent financial advice.
If you’re saving for big ticket items like a car or a wedding, use our handy savings calculator to help you work out how much to save and how long it’ll take.
**Based on Online independent research by Consumer Intelligence during November 2020, 50% of customers could save up to £228.64 on their car insurance premium.
***Based on Online independent research by Consumer Intelligence during November 2020, 50% of customers could save up to £104.18 on their home insurance premium.
How does inflation affect my savings?
Everything you buy is influenced by inflation. If inflation rises, so will the cost of everyday goods, for example, groceries, fuel etc. If your savings account interest rate is lower than the rate of inflation, you’ll be losing out because the money earned won’t buy you as much as it did a year ago.
If you want to make the most of your savings, make sure the interest rate you’re getting is higher than the rate of inflation. During the ongoing COVID-19 pandemic, inflation has fallen sharply and stands at 0.7% as of March 2021.
Find out what inflation means for your savings.
What are introductory bonus rates?
Some savings accounts offer high interest rates as incentives for new customers. But once the introductory period is up, you could be left with an interest rate that’s much lower. It could be a good idea to stick around for the introductory rate, and then compare and switch again.
Always check the terms of the introductory rate, as breaking certain rules could mean you lose it – for example, if you withdraw money before the end of the introductory period.
Can I have more than one savings account?
Yes. You can have multiple accounts as long as you meet any requirements set by the account providers. This could offer you real advantages.
Different types of savings accounts offer different benefits, from easy access to higher interest rates. For example, you might want your emergency savings in an easy access account so you can get your hands on the money if you have a problem. Alternatively, you may want to consider looking for an account that locks your money away for a set period and offers you a higher rate of interest.
You might also want to use savings accounts in different ways. For example, a branch account where you can pop in and pay cheques easily, but another that you just manage on your phone.
If you do have multiple accounts, you’ll need to keep an eye on all of them so you can move money to the better-paying accounts, if interest rates drop or when fixed-term arrangements come to an end.
Can I take my money out of a savings account whenever I want?
It depends on the rules of the account. Easy access accounts allow you to take your money out when you want, although some may specify a maximum number of withdrawals a year. Fixed term accounts might not let you take your money out at all until the end of the fixed-rate period, while others will let you do so, but might charge a heavy penalty.
How can I save for my children?
You can set up a savings account for your child. Different accounts may be aimed at different age groups, so make sure your child is the right age for the account. Children’s accounts typically work in a similar way to adult savings accounts and offer as much variety.
You can also set up a Junior ISA for your child. The money saved is put away until your child reaches 18, when it converts to an adult ISA and your child has full control over the money. It’s designed to keep savings tax-free long term, but as most children won’t pay tax on savings, this may not be a concern for you now.
After a certain age, children can apply for a savings account themselves too. But under 16s may need a parent or guardian to go with them into a branch, so always check the details of the account.
Encouraging your children to save money from their pocket money or jobs, and from birthday and Christmas money, can help get them into the savings habit, giving them a good financial footing for when they’re older.
How do I open a savings account?
This depends on the account you choose. Some accounts are opened and managed online or on the phone. Others require you to go into a branch or apply by post.
Use our comparison tool to easily see what you need to do, to open the account – it’ll be in the next steps box for each individual account.
What do you need to open a savings account?
Once you’re ready to apply for an account, you’ll need to have the basics to hand – your address, occupation and current bank details. You may need to prove your identity with a passport, driving licence or energy bill, particularly if you haven't banked with that provider before. If you want to open an ISA, you’ll need your National Insurance number too.
How do I close a savings account?
This will depend on your account provider. You may be able to close some accounts online, while for others you might have to visit a branch. If you have a fixed-term savings product, you might not be allowed to close it before the end of the term. Or if you do, you may have to pay a significant penalty.
If you want to move your ISA to another provider, you’ll need to complete a transfer form. You shouldn’t close the account with the original provider without doing this, as you won’t be able to reinvest that part of your tax-free allowance again.
I’ve already got a savings account. How often should I review it to see if it’s still right for me?
You should make sure on a regular basis that your money is still in the best account. Interest rates can change, new accounts and even new banks become available, and your own personal circumstances may change too.
Ideally you should review your options for non-fixed term savings accounts at least once a year, and if any of these things happen:
- Bonus rates end
- Your provider tells you they're reducing interest rates
- When you’ve saved enough to potentially allow you access to an account with a higher minimum deposit that could earn you more interest
- Your tax circumstances change
- You have a joint account split with your partner
- Fixed-rate deposits are coming to an end
- The Government makes changes to savings in the Budget
- Any changes are made to the limits of the Financial Services Compensation Scheme (FSCS)
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