Types of Savings Accounts

As interest rates continue to rise, so does the importance of ensuring your savings are in the right place. The savings market is flooded with various types of accounts, which makes it difficult to decide which is best for you.

Factors such as interest rates, access, tax and timing of payments will all influence your decision when selecting the best deals. Below I have covered the various types of accounts and key points to consider when finding the best deal for you.

 Easy-access

• Does what it says on the tin. They allow you to access your cash as and when you need it. Due to this, interest rates tend to be lower than other options.
• They come in many forms; some are online only, some come with cards, some only allow a certain amount of withdrawals per annum.
• Most suitable for those who need ready access to their cash, and for ‘emergency funds’.
• Interest rates are likely to be variable, so it is important that you keep an eye on rates being offered. Variable interest rates fluctuate over time and are non-guaranteed.

Notice accounts

• Require you to tell your provider in advance that you wish to access your cash. Terms of notice can vary drastically but typically they will be 30, 60 or 90 days. Generally, the longer the notice period the better the interest rate offered.
• Most suitable for those looking for better interest rates, who do not need immediate access to their cash.
• As with easy-access, these are likely to come with variable interest rates.

Regular savings accounts

• Require savers to contribute on a regular basis. They are ideal for those just starting their savings journey, or those that wish to drip feed their savings.
• Interest rates are fixed (guaranteed for a set period) or variable.
• Typically last for 12 months and restrict how much you can contribute each month. Some accounts also restrict the number of withdrawals you can make over the period.
• Often offer attractive AERs (Annual Equivalent Rates), say 5%+, but it is important to be aware that you are drip feeding your savings, so the actual interest received will be much lower than the headline AER. For example if you contribute £3,000 in regular £250 instalments, the interest paid in the first month will only apply to £250, rather than the annual total whereas if you contributed £3,000 as a lump sum into a regular savings account, interest would be applied to the full amount.

Fixed-rate bonds (term accounts)

• Offer a fixed rate of return over a period of time. They often offer the most attractive interest rates but without any access to capital over the term (other than a few limited situations such as death or severe financial difficulty (e.g. bankruptcy)).
• Bond terms vary drastically, with typical terms being 1, 2, 3 or 5 years. Normally the longer the term the better the interest rate offered.
• In a falling interest rate environment these can be great, as they fix your interest rate for the term of the bond, but the opposite is true in a raising rate environment, as your cash would be tied and you may miss out on better rates in the future.
• Many fixed-rate bonds require large initial deposits – so if you’re a beginner saver, you may struggle to find a suitable deal. In addition, some fixed-rate bonds allow you to invest just one lump sum when you open your account, and do not permit additional deposits during the term of the bond.

Cash ISAs

• Contributions form part of your £20,000 annual ISA allowance. The main benefit of these accounts is that any interest paid in excess of your personal savings allowance is non-taxable. Basic rate tax payers have a tax free personal savings allowance of £1,000, higher rate tax payers have an allowance of £500 and additional rate taxpayers do not have an allowance.
• These often have lower interest rates than other types of savings account. Some individuals prefer to use their ISA allowances elsewhere, e.g. for stocks and shares ISAs.

Conclusion

 There are many types of savings accounts available on the market. There is not one correct answer to which account you should use, and often people will use a combination of accounts to suit different needs. In the current environment it is especially important to keep an eye on the interest rates on offer, to ensure you are on the best deals. It is also, important to understand the terms of your accounts, to avoid being penalised.

At Five Wealth we offer a cash management service, which allows clients with large cash balances to sign up to one platform and seemly move their cash between various accounts without the need to undergo the application process each time. Saving clients time and effort, whilst ensuring they have the best deals available.  If this is of interest please contact one of our advisers to discuss in more detail.

Please note our cash management service, comes with a fee and is only suitable for those that have cash balances in excess of £50,000.

If you would like further information on anything covered in this article, please get in touch via the contact page.

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