Simply put, a savings account is somewhere you can safely keep any extra money you have while earning interest from it. There are lots of different types available, which can make it tough to know which savings account is best for you.
How to choose a savings account
What’s right for you depends on your circumstances, like what you’re saving for and how frequently you’ll want to get your hands on your money. Remember, you don’t have to pick just one type of savings account, you might find that mixing them up produces the tastiest result for you.
Easy access savings accounts
If you want a flexible approach to saving that gives you enough room to bend and twist depending on what happens in your life, easy access could be the way to go.
The clue is in the name. This type of savings account means you can add and take your money out quickly whenever you want without having to pay a fee or penalty.
It gives you the freedom to dip into your cash whenever you want. So, for example, you could keep emergency savings in an easy access account so you can grab your money quickly if you’re in a tight spot.
Fixed-term savings accounts
With fixed-term savings accounts, you lock your money away for a certain amount of time called a ‘fixed-term’, which could be anything from months to years. These accounts can also be referred to as term accounts or fixed rate accounts.
Normally, you won’t be able to take your money out before your fixed-term is up. Sometimes it might be possible to take money out early, but you could get stung by a fee or loss of interest if you do. It's best to check the terms and conditions of the specific fixed-term account you’re interested in to see what’s possible.
Because you’re tying your money up for a certain amount of time, they often come with higher interest rates and are normally better for long-term savings goals. You should feel confident that you won’t need the money during the time it’s locked away.
Notice savings account
With this type of saving account, you need to tell your bank or building society in advance that you want to take your money out. This notice period, as it’s known, is usually anything from 30 to 180 days. In most cases, you can't take your money out before the notice period is up.
Notice savings accounts sit in between easy access and fixed term accounts. You don’t have to tie your money up for as long as with a fixed term account, so you get an element of flexibility. But you normally get a more competitive interest rate than with easy access accounts. This can make notice savings accounts a good option for a medium-term savings goal, like saving for a house deposit or wedding.
Other types of savings accounts
We’ve ticked off three of the big types of savings accounts, but there are many others to choose from too, including special savings accounts for your children or regular savers that you have to deposit money into every month without fail.
Another popular option is Individual Savings Accounts (ISAs). They’re a type of savings account where you don’t pay tax on the interest you earn. There are different types of ISAs, and you can have as many as you want. But you can only save a certain amount into all your ISAs each tax year, which is known as the ISA allowance. Find out more about ISAs.
What type of savings account earns the most interest?
Generally, the longer you’re prepared to lock your cash away for, the higher your interest rate, and the higher your return will be. Because of this, fixed-term savings accounts normally offer the highest interest rates.
However, you should always check the details of any specific savings account you’re interested in to see what interest rate is on offer. Ideally, you don’t want to tie your money up for a set amount of time if you can get the same or better interest with a more flexible account.
With fixed-term accounts, your interest rate won’t change for the whole of your fixed-term. Interest is then added at the end of this fixed-term when the account reaches ‘maturity’.
Meanwhile, notice accounts often give you better interest rates than easy access. With both easy access and notice accounts, interest rates are normally variable, which means they can change, and the interest is added either monthly or annually depending on the account you choose.
With instant access and notice accounts, it’s a good idea to keep an eye on your interest rate. You might want to switch to a different account if you spot a sweeter interest rate deal somewhere else.
Paying tax on your savings
Thanks to the personal savings allowance, if you’re a basic rate taxpayer you’ll only have to pay tax on your savings if they net you more than £1,000 a year in interest (or £500 for higher rate taxpayers).