What is a savings account?
For those with disposable income, a savings account can be a sensible way to look after your money. Banks are able to offer savings accounts that pay you a modest interest rate each month, which is usually as a percentage of the value of your total savings. The financial institution may set a minimum amount that you must deposit to open the account and this will vary depending on the specific terms of the savings account.
Savings accounts are not typically for keeping money that you intend on using for day-to-day activity but more as an investment opportunity. You cannot earn any interest if your money is left sitting in a debit account or under a mattress at home. An active account allows you to see a return on your savings and also keep your money protected by the bank.
What are the main types of savings accounts
There are many types of savings accounts, each with their own advantages and disadvantages. When you compare savings account, it is essential that you understand the difference of each type so that you can chose an account that best serves your needs.
Individual savings account – ISA
Individual Savings Accounts, commonly known as ISAs, pay you a set interest rate on the value of your savings. ISAs were introduced by the Government in 1999 and operate similar to typical savings account but with a tax incentive.
The income you generate from a savings account is taxable by 20%, depending on your tax bracket. By paying tax, it makes the return you get from the account not very worthwhile. However, what is great about a Cash ISA is that it allows you to keep £15,000 of savings a year for the 2014/2015 tax year without having to pay tax, specifically income and capital gains tax on the interest earned. For those in high tax brackets of up to 40%, an ISA certainly constitutes the best form of savings accounts.
As a result of simplifications in the law and regulation surrounding ISAs in April 2008 using an ISA has become a much simpler. This is why for many people ISAs are an attractive option. You can invest cash, stocks and shares or a combination of the two in an ISA. Any UK resident over the age of 16 is eligible to open Cash ISA but in order to make use of the stocks and shares component of an ISA you must be over 18.
Regular savings accounts
A regular savings account requires you to make minimum monthly deposits of £50 to £250 and you can receive a high interest rate than other typical accounts. Usually lasting 12 months, a regular savings account may offer the best return of up to 10% provided you are able to afford the monthly deposits.
However, regular savings accounts have a large amount of restrictions associated to them. For instance, you are limited to the number of withdrawals you can make with some accounts with some policies lasting for very long periods. In addition some banks may only offer regular savings accounts to customers who have an existing account with them. This means that in order to benefit from the high interest rates that regular savings accounts offer you must also have a current account with the bank. As a result you need to assess the accounts as a package and look at whether they are suitable option when combined.
Before using a regular savings account, try see if you make use of the £15,000 tax-free allowance on income earned as a result of interest payment from ISA accounts. If you have used up this allowance in full and you have more money to save then it is worth considering opening a regular savings account.
It is important that you look at the account holder because adding a partner’s name may make you eligible for higher rates through a Joint Regular Savings Account. It is also possible to open an account in your child’s name.
Beware of missed monthly repayments because simply one missed repayment may cause the bank to drop your interest rate from 8% to 1%. Be sure to check the terms and conditions to see if there is a payment holiday available.
Fixed rate bonds savings accounts
If you know that you are not going to need access to your savings then fixed rate bond accounts can be a good option. With the base UK interest rate at a historic low of 0.5% more and more people are looking for ways to increase the value of their interest payments. Fixed rate bonds are an effective way to do this as you are paid a higher rate in return for agreeing to lock your cash away for 6 months to 5 years.
Since the interest rate you are paid is fixed, a fixed rate bond can offer stability that other accounts can’t since these are often tracked to the Bank of England base rate.
Agreeing to lock your savings in a fixed rate account for a longer period of time may mean that you are able to benefit from higher interest rates, however you are also imposing greater risk on your savings. This is because it is difficult to predict whether interest rates on non-fixed accounts will change in the future and as a result of this it is difficult to assess what will prove to be a more profitable place to store savings in the future.
There are many different types of fixed rate accounts. It is a good idea to make use of a fixed a rate ISA if you are determined to open a fixed rate account as you are able to benefit from the £15,000 in tax allowances that they offer.
Instant access savings accounts
If you would like more flexibility from your savings account then an instant access savings account may be the best savings account for you. Under an instant access savings account you are able to withdraw money whenever you want. However, the downside is that instant access savings accounts have typically lower interest rates than other accounts.
Additionally, instant access savings accounts tend to offer a higher interest rate for a temporary period. Although time consuming, it is possible to move your savings from different accounts in order to benefit from various bonuses that different banks may offer as an incentive to encourage new customers to open accounts with them.
Tips for getting high interest rate savings accounts
The rate of interest paid by the savings account is the first thing people tend to look for when choosing a savings account. The interest you earn is usually paid monthly or annually. Usually you are liable to pay tax on any income you earn in the form of interest payments. However certain savings accounts, notably ISAs allow you to save a certain amount of money without having to pay tax. For the financial year of 2014/2015 you are allowed to save £15,000 in an ISA every year without paying tax on the interest earned.
In addition, certain savings accounts, usually instant access savings account may offer higher interest rates for an initial temporary period as an incentive to attract new customers. It is important to look out for this when opening a savings account so that you receive the level of interest payments you expect.
Also, in order to access certain savings account that require offer the best savings account rates you may have to have another account with the bank as it may only be able to new customers. This may mean that you have to consider what another account such as a current account and a high interest savings account can offer you as a package.
When choosing a savings account you should think about how long you are able to lock your money in the account. Generally, you will be required to lock in your savings for a longer period of time so that you can benefit from top savings account rates.
Relying on interest rates as a form of income
Some savings accounts pay you your interest annually. This may be a year after you open the account or another predetermined date. Other savings accounts will pay your interest monthly. If this will option is more suitable for your financial needs then you should pursue it.
Some savings accounts may give you the choice on whether you are paid monthly or annually and this is something you should look at when you compare the best savings accounts.
Online savings accounts
Many savings accounts operate exclusively online allowing you apply and monitor your funds through their website. Several banks have an online mobile site or app, which allows you to check your progress and receive regular updates.
Top savings accounts from Quiddi Compare
Finding the best savings account for your personal needs can be a tricky task. It is important about finding the balance between a high interest rate and having regular access to your funds. The large amount of technical jargon involved doesn’t help and can make it difficult for the everyday consumer to understand what each savings account has to offer.
At Quiddi Compare we make finding the best savings account a much easier process. We search the entire market and provide information that is both detailed and easy to understand. We appreciate that every individual has different needs and as a result we have designed our comparison tool so that you are able to pick the best savings account for your unique requirements.