Which type of Savings Account is right for me?

13th July 2017

Choosing the right account isn’t always straightforward. There are a number of different types, which may or may not be appropriate, depending on whether you need immediate access or would be able to give notice in order to access your cash.

Or perhaps you would prefer to know exactly how much interest you will earn over a set period of time? Here at Savings Champion, our mission is to make each type of account clear to our customers and to help you decide which one is right for you

Of course, if you are still unsure of what is best for you, you can call us free on 0800 321 3581.

This article reviews the following savings accounts:

Instant Access or Easy Access Accounts

These are usually simple savings accounts that allow you to withdraw cash without notice.  As a result, the interest rates are often lower than on other types of account, although this is a very competitive area of the market, so there are some good deals to be found.

Whilst easy access accounts are on the whole straightforward, it is always important to check the terms and conditions so you know exactly what you are getting into.

For example, some easy access accounts include introductory bonuses, so the rate paid drops after an initial period. The key here is to be aware of when the rate will drop and switch to a better deal when this happens.

Another condition to be aware of is that with some easy access accounts there is a penalty for making more than a specified number of withdrawals, often in the form of a much lower interest rate paid. It may still be worth considering this type of account, you just need to make sure that you will not need more regular access to your funds and plan your withdrawals carefully.

High Interest Current Accounts

As the name implies, High Interest Current Accounts pay some of the very best interest rates available, in some cases more than four times what you can get on an easy access account and you do not have to tie up your funds.

However, these accounts are usually more complicated than a traditional savings account.

You must comply with the strict terms and conditions of the accounts to benefit and you are generally restricted to a fairly low maximum balance, so you will not be able to put large sums in the account.

Other potential restrictions to look out for are:

  • introductory rates
  • monthly fees
  • a requirement to set up direct debits
  • a minimum amount to pay in each month
  • a minimum amount to maintain in the account

Setting up standing orders is an easy way to ensure you deposit and withdraw the qualifying amounts each month and can be effective in managing multiple current accounts.

It may take a while to set it all up in the first place, but the rates on offer could make it all worthwhile. It is also worth remembering that many of these accounts can be opened without having to switch your main current account.

A final point to bear in mind is that some of these accounts give you access to exclusive linked savings accounts which often pay competitive rates, especially true with regular savings accounts.

If you need any help with using High Interest Current Accounts as part of your savings portfolio, please call 0800 321 3581 to talk to one of our experts.

Notice Accounts

Just as it sounds, these savings accounts require you to give notice in order to access your money without a penalty. The usual notice period ranges from 7 to 120 days, although there are some accounts on the market that require 6 months or even a year’s notice.

Notice Accounts generally pay better rates of interest than easy access accounts, but not in every case. These accounts can be ideal for those able to plan ahead and do not need immediate access to their funds.

For some people, not being able to access the money immediately is important to help them to resist dipping into the account and it could be a way of getting a higher return on money that you know you will not need straight away.

Should you need to access your savings however, some accounts give the option to forego the notice period by paying a penalty, typically a reduction of interest equivalent to the notice period.

This can be taken from the capital if insufficient interest has built up prior to access, so it’s important to plan carefully. However, not all accounts allow this option, so you need to check this before opening an account.

Regular Savings Accounts

If you don’t have a lump sum to invest, you can always save a regular amount each month. You can do this with a normal Easy Access Account or Notice Account or you can take advantage of a Regular Savings Account, which often pay significantly better rates of interest.

Regular Savings Accounts are ideal for those looking to start getting into the savings habit or to save up for a special purchase.

Of course, there are likely to be some conditions in the form of restricted access and the requirement to pay a regular amount every month for a fixed period, normally 12 months.

Accounts will have different terms and conditions: for example, sometimes you only need to make 11 out of 12 payments for the year; with some accounts you can vary the amount you save while with others the amount must be the same and occasionally a limited number of withdrawals may be allowed.

In general terms, these accounts are designed for you to save a regular amount each month and to not dip into the funds and the restrictions normally reflect this. It is important to check the terms and conditions of the account before opening it to ensure that you can stick to the rules.

It is also worth noting that many of the top-paying accounts are only available to those who hold a current account with the provider, however, in some cases you will be able combine this with a High Interest Current Account for even better returns.

There are also Regular Savings Accounts that can only be opened in branch, so are only suitable for those local to the provider. In both of these cases, the provider is aiming to encourage a deeper relationship with savers, but this could of course be used to your advantage.

Our best buy table always includes at least one account that can be opened without needing a provider’s current account and that doesn’t have to be opened in branch, to cater for all savers.

Regular Savings Accounts normally offer a fixed rate of interest for a set term, but there are also many variable rate accounts around, so keep your eyes peeled and check out the information on our Best Buy Table.

Fixed Rate Accounts

There are many different terms used to describe this type of account, most commonly Fixed Rate Bonds, Fixed Rate Deposits or Fixed Rate Savings.

These are accounts that pay a fixed interest rate for a set term, usually ranging from six months to five years, although there are a couple of providers that offer fixed rates for as long as seven or even ten years, from time to time.

Some of the best interest rates available can be found amongst fixed rate accounts, as you are essentially sacrificing easy access to your funds for a better return.

It is also one of the most competitive areas of the market, especially amongst the newer Challenger Banks, as it is a great way to entice savers in and knowing how long the money will be held for, allows providers to plan ahead effectively.

Unfortunately, this also means that providers dip in and out of the tables when they have sufficient funds, so the top rates do not always hang around for long.

Normally you cannot access your money at all until the end of the term, although some providers will allow some access to the funds. There are a limited number of providers that offer penalty-free withdrawals, but it’s more usual for there to be a hefty penalty, equivalent to a loss of interest earned over a defined period.

Make sure you check the terms and conditions of individual accounts before going ahead.

For example, a one year fixed rate savings account offering access may impose a penalty equivalent to 90 days’ loss of interest on the amount being withdrawn.

Other providers state that funds can only be accessed by closing the account completely, again subject to a penalty. It is really important to note that a penalty can be taken out of the capital originally invested, if sufficient interest has not been earned at the time of withdrawal.

This is why it’s important to make sure that you are able to lock your money away for the full term if you are looking at fixed rate accounts.

Fixed Rate Bonds offer some of the best returns on the market and it is a competitive area, so it is important to keep an eye on the best buy tables on a regular basis, as things can change quickly and the top rates do not always last for long. 

Sharia Compliant Savings Accounts

Sharia compliant savings accounts are accounts that comply with Islamic law but are available to any saver, regardless of religion or culture.

As Sharia law states that money itself had no intrinsic value, neither party can profit from an exchange of money, therefore the payment and receipt of interest is forbidden.

Instead, Sharia compliant accounts pay an 'Expected Profit Rate' as an alternative to interest, which is the level of profit paid by the provider to the saver.

Sharia compliant accounts have been part of the savings landscape for some time now, although it’s only in the last few years that their popularity appears to have grown amongst savers.

Whilst Fixed Term Deposits are the most common type of Sharia Compliant Account, there are also Easy Access Accounts, Notice Accounts and both Variable Rate and Fixed Term Cash ISAs available.

These accounts work broadly in the same way as the standard equivalents, although of course each pays an expected profit rate rather than interest.

The provider invests the money deposited by savers to generate a profit, so there is an inherent risk involved, as the return received depends on the performance of the investments made.

Having said that, providers are keen to state that Expected Profit Rates are usually achieved and most providers allow you to take funds away early if the Expected Profit Rate is not likely to be achieved.

It is also worth noting that the risk involved is to the level of return only; the capital is no more at risk than in a standard savings account, provided of course you keep within the Financial Services Compensation Scheme (FSCS) limit, currently £85,000.

Whilst the accounts are primarily designed for those people who would like to get a return on their savings, without compromising their faith, they can be suitable for all savers.

However, it is important to make sure you are happy with how the Expected Profit Rate is generated and paid and it is also worth looking at the provider's track record in achieving profit rates in the past to ensure that you are comfortable with this before proceeding.

We have a Best Buy Table that is dedicated solely to Sharia Compliant accounts, with a selection of the top paying accounts at the current time.

National Savings & Investments (NS&I)

NS&I is a savings institution that is backed by the Government and is therefore often considered by savers to be the most secure provider of the lot.  As a result, the interest rates offered are rarely the best on the market.  

Premium Bonds are an old favourite but more of a lottery than a savings account, although unlike the lottery, you won’t lose your original capital and you might just win a big prize.

Index Linked Savings Certificates can be useful, especially for taxpayers, as they will pay a rate equivalent to the Retail Prices Index, plus a little extra, over either two, three or five years.  

As the returns from these are tax-free, you can be sure that your money will always be protected from inflation. These accounts are not currently available to open, but those already holding a previous version are able to continue after maturity.

Perhaps the most interesting development from NS&I in recent years has been the launch of the 65+ Guaranteed Growth Bonds, often referred to as ‘Pensioner Bonds’ in the media.

Available for either one or three years, the rates on offer were far in excess of the competition at the time. Each saver over 65 could put up to £10,000 into each term and the accounts proved extremely popular.

Unfortunately, the options on offer from NS&I on maturity of the 1 year bond were disappointing and if that remains the case, many providers will see an influx of funds, as the 3 year accounts mature.

Most recently we saw the re-launch of the NS&I 1 year and 3 year Guaranteed Income Bonds and Guaranteed Growth Bonds, which were last on sale in 2009.

One of the main benefits of these Bonds is the amount that can be deposited.

While the Pensioner Bonds had a maximum deposit limit of £10,000 per customer, per bond and the more recently launched Investment Guaranteed Growth Bonds have an even smaller maximum of £3,000 per customer, the Guaranteed Income and Growth Bonds have a maximum deposit of £1 million per issue, per person – and this is all completely secure.

Another feature that these bonds offer, compared to the majority of the rest of the fixed rate bond savings market, is the fact that there is access to the money within the term, although with a penalty equivalent to 90 days gross interest.

NS&I remains a popular choice for savers due to the fact that all money placed with the provider is protected. However, due to the advantage that this gives NS&I over the rest of the market, we have often found that the provider has to stem the inflow of funds by making its rates less attractive.

In many cases better rates can be found elsewhere and provided you keep within the Financial Services Compensation Scheme (FSCS) limits, your money is still protected, should the chosen provider fail.

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