Putting some money aside is always a good idea, whether you’re saving for something specific, building an emergency fund, or simply saving for a rainy day. But with hundreds of savings accounts out there, how do you choose which one is right for you?
The Bank of England bank rate is still languishing at an all-time low of 0.5 per cent, which means you’ll need to find a competitive interest rate to get the best return on savings. But the good news is that many financial services companies are still offering respectable rates of above two per cent, so shopping around could see you get a good deal.
Different savings accounts operate in different ways, so you need to decide what you want the account for and how you will use it.
Access: If you’re comfortable managing your savings online and over the phone, you may find you can get a better rate with these types of accounts than if you go for a branch-based option. Online savings accounts are becoming much more common, and allow you to manage your account yourself, keeping a close eye on how your cash is growing. However, if you prefer a counter service, one of your first tasks will be to check the rates of providers near to you.
Withdrawal restrictions: Some accounts that pay a higher rate of interest limit the number of withdrawals you are able to make in a given period. You therefore have to look at the trade offs between rate and access to funds. Often fixed-rate savings may restrict you from making any withdrawals at all during the fixed-rate period, or perhaps for the first year.
This doesn’t necessarily mean that there is no way at all that you can get to your money, but if you do make a withdrawal, you may lose interest. So if you anticipate needing regular access to your cash, you may find that a flexible account will be better for you. Try to ensure you select an account that will suit your savings needs and habits.
Lump sum Vs regular saver: If you are planning on depositing a significant amount of money into the account at the start – but without really adding to it or making withdrawals in the near future – then fixed-period accounts may pay a better rate of interest.
Tax-efficient savings: Every UK adult is entitled to save up to £10,200 each year in a tax-efficient account known as an Individual Savings Account (ISA). The entire allowance can be saved in a Stocks and Shares ISA, or if preferred, you can save up to £5,100 in a cash ISA and the remaining amount in a Stocks and Shares ISA. By using an ISA, any income you receive from your savings or investments is tax-free (apart from dividend income on your investments which are taxed at 10%). Depending on the account you choose, you can make withdrawals whenever you like, but you are never allowed to deposit more than the maximum amount per year, even if you have made withdrawals.
The money you deposit within your ISA remains tax-free for as long as you keep it there (it’s only dividend payments on shares and investments that are taxed), and you can transfer between ISA accounts and providers without losing this benefit. However, withdrawing funds or switching providers may affect any annual interest payments you receive.
Investment: Some savers looking to make a better return over the medium or long term may decide an investment account is a better option. These accounts invest in the stock, bond, money and other markets. While the gains you make may be higher with an investment account, those gains are not guaranteed and you run the risk of getting out less than you put in. You are best to seek professional advice if you are looking to make medium or longer term investments.