There are few things more important than having a savings account when it comes to your finances. This is your chance to put away money for a rainy day and make sure you have a cushion in case of tough times. In this guide, we will discuss everything you need to know about savings accounts in the UK. We’ll cover interest rates, fees, and how to find the best deal for you.
So, whether you’re just starting out or you’re looking for a better deal, read on for all the information you need.
What is a Savings Account?
A savings account is a type of bank account where you can deposit money and earn interest on it. The interest rate is usually lower than that of a regular checking or savings account, but it’s a great way to grow your money over time.
There are many different types of savings accounts available in the UK, so it’s important to shop around and find one that best suits your needs. Financial institutions typically offer these accounts, including banks or building societies. These accounts are risk-free since there’s no investment. It’s simply an account designed to keep your money in a safe place, while earning a small, but predictable return.
How does a Savings Account work?
You’ll be asked to set up an initial deposit when you open a savings account. Once you’ve deposited your money, you can generally add and take money out of your account as and when you please. Some banks may also require you to maintain a certain balance in your account, or they may charge fees, so it’s always worth checking out to be sure what the terms and conditions are. What’s more, the interest rate on your savings account will depend on the bank and the type of account you choose. Rates can change over time, so it’s important to keep an eye on them.
Savings accounts can be found anywhere and are offered by pretty much every financial institution. This is because they provide a large amount of the funds needed to run a financial institution, whether that’s in a physical branch or online. However, just like a current account, most savings accounts can be accessed at an ATM or online at any time. This means you have easy access and control over your money and how you want to use it.
What are the types of Savings Account?
The different types of saving account are:
- Fixed-Rate Savings Account – With a fixed-rate savings account, you’ll earn interest at a set rate for a certain period of time. This could be anywhere from six months to five years. The main benefit of this type of account is that you know exactly how much interest you’ll earn over the fixed period. This can make budgeting and planning ahead much more accessible. However, the downside is that if interest rates rise during your fixed period, you won’t be able to take advantage of it.
- Variable Rate Savings Account – A variable-rate savings account means that the interest rate can go up or down at any time. This could make it difficult to budget, as you won’t know how much interest you’ll earn in the long term. However, the upside is that if rates do go up, your interest will increase too.
- Cash ISAs – A Cash ISA is a type of savings account where you don’t pay tax on the interest you earn. This makes them a great way to grow your money, as all of the interest is yours to keep. There are two types of Cash ISAs: instant access and fixed term. An instant access Cash ISA means you can take your money out at any time, without any notice period or penalties. A fixed-term Cash ISA usually has a term of between one and five years, during which time you can’t access your money without incurring a penalty.
- Help to Buy ISAs – A Help to Buy ISA is a type of savings account that’s designed to help first-time buyers save for a deposit on a property. The government will top up your savings by 25%, up to a maximum of £3000. To be eligible, you must be 18 or over (and your first deposit must be made before you reach the age of 40) and buy your first home worth £250,000 or less in the UK. You’ll also need to open the account with a minimum deposit of £1000 and make regular monthly deposits of up to £200.
- Lifetime ISAs – A Lifetime ISA is a type of savings account that’s designed to help you save for retirement or to buy your first home. You can open a Lifetime ISA from the age of 18 and continue saving into it until you’re 50. The government will then top up your savings by 25%, up to a maximum of £3000 per year. This means that for every £4000 you save, the government will give you an extra £1000. You can use your Lifetime ISA to buy your first home worth £450,000 or less anywhere in the UK, or you can keep it until you’re 60 and use it for retirement. There are some other conditions to be aware of, however. For example, if you take your money out early, you will lose any money you’ve made. However, you can take your money out if you’re terminally ill and have less than 12 months to live.
- Savings Accounts for Children – If you’re looking to start saving for your child’s future, a few different options are available. One option is to open a Junior ISA, which is similar to an adult ISA but with a few key differences. For example, the maximum amount you can save each year is lower (currently £4000), and you can’t access the money until your child turns 18. Another option is to open a Child Trust Fund. This is a long-term savings account that some banks and building societies offer. The government also used to provide them, but they’re no longer available for new babies. With a Child Trust Fund, you can save up to £4000 per year, and the money can’t be accessed until your child turns 18. The final option is to open a savings account in your child’s name. This could be a regular savings account or an ISA, depending on which type of account you think would suit them best. There are some things to bear in mind with this option, however. For example, you’ll need to have your child’s permission to access the money if they’re over the age of 16.
- Regular Savings Accounts – A regular savings account is a type of savings account that makes regular deposits, usually monthly. The main benefit of a regular savings account is that they often offer higher interest rates than other types of accounts. This means you can earn more interest in your money over time. However, there are some things to bear in mind with regular savings accounts. For example, you may need to make a minimum deposit each month, and there may be limits on how many withdrawals you can make.
What are the advantages of a Savings Account?
The advantages of savings accounts are:
|What are the advantages of a Savings Account?||What are the disadvantages of a Savings Account?|
|You can easily access your money in a branch, online, or via an app, and withdraw and transfer as you please with most savings account||The interest rates are relatively low compared with other accounts and investment types|
|Money in savings accounts stays as cash, which allows for instant access.||Some accounts require a minimum balance to be met at all times|
|Money in savings accounts is protected by the FSCS, so even if the bank closes, you’re covered.||Some accounts may have withdrawal restrictions|
|You can gain interest on your savings, making you a little money.|
|Accounts are easy to open with few eligibility requirements|
|You can pay bills and make payments from your savings accounts, and even set up automation|
|You can open and close accounts as you please, with few lock-in conditions|
- Easy Access and Control: One of the key advantages of savings accounts is that they offer easy access to your money. This means you can withdraw your money at any time without having to give notice or pay a fee. This is in contrast to other types of investments, such as stocks and shares, which can be more difficult to cash in. With a savings account, you have complete control over your money and can access it whenever you need to.
- Savings Accounts are Liquid Assets: Another key advantage of savings accounts is that they’re considered to be liquid assets. This means they can be easily converted into cash if you need to. This is in contrast to other types of assets, such as property, which can take longer to sell. With a savings account, you know that you can always access your money if you need to.
- Your Money is Protected: When you put your money into a savings account, you know that it’s protected. This is because all savings accounts in the UK are covered by the Financial Services Compensation Scheme (FSCS). This means that if your bank or building society goes bust, you’ll get your money back up to a limit of £85000. This gives you peace of mind knowing that your money is safe.
- You Gain Interest on Your Money: Another key advantage of savings accounts is that you gain interest on your money. This means that your money will grow over time, giving you an excellent return on your investment. Of course, the amount of interest you earn will depend on the account you choose and the current interest rates. However, it’s still a good way to boost your savings.
- Easy to Open Accounts: It’s worth noting that savings accounts are straightforward to open. You can usually do this online in a matter of minutes. This is in contrast to other types of investment, such as stocks and shares, which can be more difficult to get started with. With a savings account, you can start saving straight away.
- Bills Can Be Automated: Another advantage of savings accounts is that you can automate your bills. You can set up a direct debit to automatically pay your bills each month. This is a great way to make sure you never miss a payment, and it can help you to budget more effectively. It’s also one of the easiest ways to save money as you don’t have to think about it.
- You’re Not Locked-In (Always): Since most savings accounts are fairly casual and operate as safe places for your money, this means you’re not locked in and can withdraw your money at any time without penalty. This gives you flexibility and control over your money. However it’s worth bearing in mind that if you withdraw your money early, you may lose out on interest. What’s more, types of savings accounts, like ISAs, have restrictions which mean you can’t withdraw before a certain time, so make sure you’re researching this beforehand.
What are the disadvantages of a Savings Account?
The disadvantages of saving accounts are:
- Low Interest Rates: One of the biggest disadvantages of savings accounts is that they often have low-interest rates. This means you won’t earn a lot of money on your investment, and it could take a long time to see any significant growth. Of course, the interest rate will depend on the account you choose and the current market conditions. However, in general, savings account interest rates are quite low. This is one of the main reasons why people invest their money in other ways, such as stocks and shares. With these types of investments, you can potentially earn a higher return.
- Minimum Balance Requirements: Another disadvantage of savings accounts is that some of them have minimum balance requirements. This means you need to keep a certain amount of money in your account at all times. If you don’t, you may be charged a fee, or you may lose interest on your account. This can be difficult to manage, especially if you have other financial commitments. It’s worth noting that not all savings accounts have minimum balance requirements. However, it’s something to be aware of if you’re thinking of opening an account.
- Restrictions on Withdrawals: As we mentioned before, some types of savings accounts have restrictions on withdrawals. For example, with an ISA, you can’t withdraw your money until you’ve had the account for a certain amount of time. This can be frustrating if you need access to your money quickly. It’s important to bear this in mind when choosing a savings account.
How can I apply for a Savings Account?
Applying for a savings account is usually a fairly straightforward process. Most banks and building societies will have an online application form that you can fill out. It’s important to compare different accounts before you apply to make sure you’re getting the best deal. Once you’ve found the right account for you, simply follow the instructions on the application form.
In most cases, you’ll need to provide some personal details, such as your name, address, and date of birth. You may also need to provide proof of ID, such as a passport or driving licence. Once your application has been processed, your new account will be opened and ready to use. You can then start transferring money into it and begin earning interest on your savings.
Depending on which type you go for, there may be some requirements for opening a savings account. For example, some accounts may require you to open a current account with the same bank. There may also be a minimum deposit amount or age restrictions, so it’s important to check this before applying.
What is the difference between a Savings Account and a Deposit Account?
The main difference between a savings account and a deposit account is that a deposit account usually has a fixed term. This means you agree to leave your money in the account for a set period of time, such as six months or one year. In return, you’ll usually get a higher interest rate than you would with a savings account.
With a savings account, you can withdraw your money at any time without penalty. This gives you flexibility and control over your money. It’s worth bearing in mind, however, that if you withdraw your money early, you may lose out on interest. What’s more, types of savings accounts, like ISAs, have restrictions which mean you can’t withdraw before a certain time, so it’s important to check this before you open an account.
When is a savings account most useful?
A savings account can be a useful tool for anyone who wants to save money. It’s a safe and easy way to put your money away and watch it grow over time. If you’re looking for a long-term investment, then a deposit account may be more suitable. However, if you want flexibility and control over your money, then a savings account is probably the better option.
Do savings accounts have interest?
Yes, savings accounts usually offer interest. This means that your money will grow over time as you earn interest on your deposits. The amount of interest you earn will depend on the type of account you have and the current interest rates.
Typically, savings accounts don’t have high-interest rates, so you won’t really be making that much, especially when compared with higher-risk investments, but this is because you’re benefiting from the safety of the savings accounts, and there’s no risk of losing money.
Is a savings account an investment?
No, a savings account is not an investment. This is because you’re not really doing anything with your money other than keeping it safe and earning a small amount of interest. You’re not taking on any risk, so there’s no chance of making or losing money. However, you are still benefiting from the interest that you earn on your deposits (assuming it remains above inflation). In this way, a savings account can be seen as a low-risk way to save money.