Understanding the different types of savings accounts
Last reviewed on 24 March 2017
There are literally hundreds of savings accounts to choose from. To narrow down the choice, it's worth spending time deciding what you want from a savings account and how you want to run it.
Factors to consider
There are a number of factors to consider when choosing a savings account including:
- How you want to run your account. Do you want it branch-based with a passbook or are you happy to operate your account online, by phone or by post?
- How quickly you want to get at your money. Do you want instant access, can you wait a few days for a cheque to be posted or would you consider giving several months' notice to get a better return?
- How long can you tie up your money for? Some accounts pay a higher rate of interest if you agree to leave your money deposited for a set period of time.
- How much you have to put into a savings account. Do you have a lump sum or are you looking to save on a regular or ad hoc basis?
- Do you want a fixed rate of interest or a variable rate of interest which can go up and down?
Types of savings accounts
A variety of savings accounts are available.
- Instant access accounts, where you can get at your money immediately usually via a branch or cash machine.
- Easy access accounts, where your money is usually transferred to another account within a few days.
- Notice accounts, where you have to give a set amount of notice before you can withdraw your money.
- Regular savings accounts, where you agree to save a set amount each month, usually for a higher rate of interest.
- Children's accounts, which are specifically designed for children. These accounts may pay a preferential rate of interest and send your child a free gift and a card on their birthday.
- Tax-free cash ISAs.
- National Savings & Investment Savings Certificates.
What to watch out for
It's easy just to look at the headline rate when choosing a savings account but there are several potential pitfalls worth watching out for.
- If an account pays an introductory rate of interest, check what happens after this period. Similarly, if there's a bonus paid, check what you have to do to qualify for it.
- Check if there are any penalties for early or numerous withdrawals.
- Some regional building societies only offer certain products to local people.
- Is there is minimum or maximum deposit?
- Some savings products are only available to existing customers or shareholders. You might need a particular current account, investment or mortgage with the provider to be eligible.
Best-paying savings accounts
Notice accounts and fixed-term accounts (sometimes called bonds), where you have to tie up your money for a set period of time, tend to pay better rates than instant or easy-access accounts.
Interest rates are often tiered which means the more money you have in your account, the better the rate of interest you earn.
Regular savings accounts also often pay favourable rates of interest to get you in the savings habit.
From 6 April 2016, if you’re a basic-rate taxpayer you’ll be able to earn up to £1,000 in savings interest tax-free. Higher-rate taxpayers will be able to earn up to £500. This is called the Personal Savings Allowance.
If you earn more interest on your savings than this, HMRC says it will usually clooect this by an adjustment to your tax code. If you already complete a tax return each year HMRC says you should continue to do this as normal.
But some savings products, such as cash ISAs and some National Savings & Investment products are tax-free. This means that you do not pay any tax on the interest you earn on these savings accounts regardless of how much interest you may earn elsewhere. And anyone with total taxable income (that’s the income on which you pay income tax and includes your savings) of less than £17,000 pays no tax on any savings income.
You can find out more about savings tax in our How savings are taxed guide.