How to choose between different types of savings accounts
Last updated on 14 March 2016
With so many savings products on the market, choosing the best one for your needs can be a daunting task. But if you ask yourself a few basic questions about what you want from your savings provider, you can quickly whittle down the choice.
Types of savings account
There are literally hundreds of different savings products to choose from, so it's easy to feel overwhelmed. As well as numerous savings accounts, there are fixed-rate bonds, tax-free cash ISAs, National Savings & Investments (NS&I) Savings Certificates, credit union savings accounts, and if you want to link the return on your savings to the stock market there are guaranteed equity bonds.
What to consider when choosing a savings account
To help narrow down the choice you could ask yourself the questions below.
- Do you have a lump sum and/or do you plan to save on a regular basis? With some savings products you need a lump sum and with others you can save either on a regular basis or when you feel like it.
- Are you a taxpayer? From 6 April 2016 basic-rate and higher-rate taxpayers will have their own Personal Savings Allowance. This allows them to earn up to £1,000 (basic-rate taxpayers) or £500 (higher-rate taxpayers) in savings interest before they have to pay any tax on this. And anyone with less than £17,000 of total taxable income won’t pay tax on any of their savings. On top of this there are various tax-free savings products such as cash ISAs and NS&I Savings Certificates which pay out tax-free interest. These can be particularly attractive if you have a lot of money in savings or are saving for the long-term and don’t know if your tax position will change. If you have a partner you may want to ensure you both make the most of your tax-free savings allowances
- If you are, then tax-free savings products such as cash ISAs and NS&I Savings Certificates can be particularly attractive. If you have a partner you may want to ensure you both make the most of your tax-free savings allowances.
- How long do you want the savings account for? For example, are you prepared to tie up your money for one, three or five years in the hope of better returns? Fixed-term products include fixed-term savings accounts and cash ISAs, bank and building society bonds, NS&I Savings Certificates and guaranteed equity bonds.
- How quickly do you want to be able to get at your money? For example, do you want instant access to your cash or are you prepared to give notice?
- Do you want a fixed-rate or variable-rate product? With a fixed-rate savings account you know exactly how much interest your money will earn for a set period of time. But if interest rates rise during this period you could lose out. If you think this might happen you may prefer a variable rate.
- Do you want the return on your savings linked to interest rates or something else? For example, NS&I Index-linked Certificates pay inflation plus a set rate of interest, which means your savings are guaranteed to keep up with inflation. With guaranteed equity bonds the return on your savings is linked to the stock market rather than interest rates.
- Is it important who provides the savings product? For example, would you only consider a Sharia-compliant provider or saving with a credit union?
- How do you want to run your savings account? For example, would you consider a postal savings account?
Once you've decided on the features you want, this should make it easier to decide what type of product you want. The most common types of savings products available are listed below.
- Cash ISAs
- Savings accounts
- NS&I savings products
- Credit union savings accounts
- Sharia-compliant savings products
- Guaranteed equity bonds (GEBs). These are lump sum savings products which run for a fixed term of typically three to seven years. Investors are guaranteed to get back their original investment when the bond matures plus a return which is linked to the performance of one or more stock markets. The return is taxable unless the GEB is in an ISA. So if the stock markets perform well your money could earn more than it would in a savings account. But if the stock markets perform poorly, you might earn only a small return or only get back your initial investment.
GEBs are offered on an ad hoc basis by banks, building societies, NS&I and other financial firms. The terms of each GEB differ, so you need to look at them individually.