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Savings accounts provide a safe place to keep your cash either for a rainy day or for that special something. Although savings accounts offer a lower rate of return than investing, they provide the security of getting back all the money that you put in, plus a little extra in interest.
The rate war currently being fought by banks vying for your custom means your money is working harder than ever before. But the deluge of offers that have sprung up along the high street, in building societies and on the internet can be quite confusing, with a number of catches and clauses that could and up costing you cash.
So don’t just be sucked in by the first attractive offer you come across, use our ten-point guide to get the best from your savings account.
1. Easy access accounts
These types of savings accounts let you take your money out whenever you need it without having to give notice or incurring a penalty. With most easy access accounts you can begin by investing as little as £1, making them great for first-time savers who might need fast access to their money.
However, the rates offered are usually less than you would receive with more rigid savings accounts. Your rate is also likely to be linked to the Bank of England base rate, which means that if it goes up, your interest will increase, but it will also decrease if the base rate goes down – so keep an eye on what’s happening in your account.
Despite having variable interest rates, some accounts also give a guarantee to keep rates at a competitive level.
Sainsbury’s Internet Saver account also promises to keep your rate above that of over 100 equivalent bank accounts until 2010 and currently offers a rate of 5.25 per cent.
Check out Savings Account Best Buy Tables and read the terms and conditions for more info on any account you’re interested in.
2. Notice accounts
With some savings accounts you have to provide the bank with notice of when you want to withdraw some money. This period can range from seven days, up to 120 days, though the typical amount of time is 30 to 60 days.
These accounts offer higher rates of interest than easy access accounts, but are obviously less flexible. However, the rigidity of a notice account can be of benefit to people who tend to regularly dip into their savings as the penalty discourages them.
The usual punishment is the loss of interest on the amount withdrawn for the length of notice required on that account, but this varies from one to the other.
3. Fixed term accounts
These accounts offer a fixed interest rate, protecting you from losing out if the base rate drops, but this also means that you won’t benefit from any rate increases during for the agreed amount of time either.
Fixed term accounts often have a minimum balance requirement, and if your savings drop below this margin your interest rate could be lowered. However, if you can afford to lock your money away for a fixed amount of time, these accounts can be great.
4. Regular saver accounts
These accounts require you to make regular deposits, usually of a set amount, into the account each month. While this means that your savings will grow quickly, these accounts have the most restrictions attached, and often attract investors using flashy bonuses that you could end up losing, or introductory offers that don’t last. However, you will often get a rate of at least six per cent – much higher than most other savings accounts.
Usually you can only make a fixed number of withdrawals, sometimes none at all, you cannot miss any deposits or your interest rate will drop, and most providers don’t allow lump sums to be invested.
Most regular savers accounts are variable and easy access, but notice and fixed term accounts are available too.
5. Introductory deals
Once you have chosen the type of savings account that you want, you need to narrow down your search by looking at the individual terms and conditions applicable to each account. Here are some of the things that you should be looking out for:
Some of the rates advertised by banks look especially good because they include an introductory offer. Look at the small print and see how long the offer lasts – most are between six and 12 months.
You might be planning on simply transferring your savings once the introductory offer has expired, but some accounts have clauses to prevent you from doing this. For example, you might get a great rate for the first six months, but the interest might not be paid until the account has matured, which could take another six months. If you move it sooner, your rate will drop.
Make sure you read all the small print, and work out if you could make more in interest by taking a slightly lower rate that lasts longer.
Look out for exit charges, as some banks have begun to introduce them to prevent people constantly switching to get the best new deal.
6. Regularity of interest payments
You need to know when the interest will be paid into your account, and also when it begins to accumulate, as this can make a real difference to the account you choose.
Interest will be paid into your account either monthly or yearly. You generally get a better rate if you have it paid in yearly, but this rate can drop if you make more than a specified number of withdrawals or move your money to another account before the year is up.
You should also find out when the interest begins to add up. Many accounts start to add it from the day that your money is paid in, but some others only count your interest up monthly, so you will be losing out with one like this.
This kind of information is usually only found in the terms and conditions section of the account information – the part that many people skip. As boring as it may seem, it is important to read this section, as that’s where you’ll find out about any extra benefits – and charges.
7. Minimum balances and cash withdrawals
Many accounts have a minimum balance condition, which means that your interest goes down if your savings drop below the agreed level.
Unless you have a notice savings account, you wouldn’t expect to be charged or penalised for taking your money out. But beware, as this isn’t always the case. For example, although it’s an easy access account meaning that you don’t have to give notice for withdrawals, taking money out of an Alliance & Leicester DirectSaver account means that you won’t earn any interest on the whole balance, not just the amount taken out, for the rest of that month. There’s also a £5,000 minimum balance.
8. Protection
The Banking Code states that all banks signed up must offer a fair service and provide certain information to its customers, like APRs. To see if your bank has signed up, or to find out more, check out the British Banker’s Association website.
There’s also the Financial Services Compensation Scheme (FSCS), which was put into place to protect people who had saved with a company that then goes bust.
This scheme awards 100 per cent compensation of the first £2,000, and then 90 per cent of the next £33,000 – a total of £31,700. So if you are concerned about a Barings style bank collapse, you should never invest more than £35,000 with a single provider.
Check out the FSCS website for more information.
9. Switching
If you opened a savings account because of a great introductory offer which is no longer so great, then you should consider moving your money. In such a competitive market there are always newer, better deals available.
Use a best buy table to compare offers, but bear in mind the points in this guide. And always double-check the terms and conditions on your current savings account, and the one that you want to switch to. Some accounts have penalties for moving your savings, or will reduce the rate at which your yearly interest is paid if the account hasn’t matured.
10. Finally
Remember that this article deals with traditional savings accounts, which are more flexible and secure than many other forms of savings and investment, such as mini and maxi ISAs and investments.
You should always be sure to pay off your debts before you begin to save, as the interest you pay to credit card and loan companies will be far more than you will earn on your savings.
Also, write up a good budget and don’t try to save more than you can afford. There’s no point in putting away so much that you have to take it out again to pay your rent.
Understanding your account is essential to finding one that suits your needs and works best for you, as is keeping yourself informed and up-to-date on any changes to the terms and conditions, or the rate paid on your account.
Finally, always remember to shop around. Some of the best deals and highest interest rates can be found on the internet, so don’t be afraid to open an internet-only bank account – just be sure to go with a reputable provider.
