Savings
Your options explained
Saving is about putting money away in a bank account that pays you interest on the amount you put in. Subject to changes in the inflation rate, you'll usually get back the amount you started with, plus the interest. So it's a low-risk place to store money for a rainy day or a specific purpose.
There are lots of different types of savings account available. The right one for you will depend on how much you plan to save; how often; how long you plan to leave the cash in the account; and how quickly you might need to withdraw it in the future. Here we'll cover the basic options to help you decide which is best.
Understanding the different types of saving account
Instant access
As the name suggests, you will be able to withdraw your cash in part or in full whenever you need to. Some come with a card so you can withdraw your cash from a hole in the wall, as you would from a current account. There may be a minimum amount you need to keep in the account to retain all the benefits. You may find you'll get a better interest rate through an internet-based account, so be sure to do your research.
At a glance:
- Easy to set up and manage
- Save a little or as much as you want
- Get your money when you need it
Notice accounts
These work in a similar way to a standard instant access account except that you will have to give notice to withdraw your money. The notice depends on the terms of the account - it could be as much as 90 days. But what you lose in flexibility, you could gain in better interest rates. If you have an emergency and need your money urgently, you can still access it without notice, but you will forfeit some of the interest.
At a glance:
- Save as little or as much as you want
- Can offer high rates of interest
- Makes you think twice before dipping in
Cash ISAs
Cash Individual Savings Accounts (ISAs) allow you to save up to £5,340 per year and not pay tax on the interest, as long as you're a UK resident for tax purposes. While it may not seem like they offer as good a rate of interest as some savings accounts, when you compare the gross rate (before tax) with the net rate (after tax) of interest, you may find you'll earn more. However, if you need to withdraw funds for an emergency and you had invested the maximum amount, you won't be able to top it back up in the same tax year.
You may want to consider a Stocks and Shares ISA, which allows you to invest up to £10,680 with the same tax benefits, although this carries some risk as you are investing in the stock market.
At a glance:
- Save up to £5,340 tax-free in cash
- You can switch provider to take advantage of changing interest rates (although watch out for any penalties or other charges that may apply)
- Once you have used your full allowance, you can't replace any cash withdrawn until the next tax year
Regular savings accounts
Ideal if you can commit to saving a regular (monthly) amount, which can be as little as £5 with some accounts. Because banks like to build loyalty, you may find the bank that holds your current account is able to offer you a higher rate of interest if you set up a standing order or direct debit to pay the money in each month. It's worth knowing that if you stop paying in regularly, there may be interest penalties.
At a glance:
- Some offer an annual bonus on top if you make regular payments
- Possible higher basic savings rates
- There's usually an upper limit as to how much you can pay in
Where next?
Take a look at investment options
Use our budget planner