Types of savings accounts

What types of savings accounts are available and how do they differ?

We've outlined some key things you may want to think about to make sure you choose the right type of account for your needs.

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Building society versus a bank

The main difference between a building society and a bank is that building societies are owned and run by their members – the people who save and borrow with them. Banks tend to be floated on the stock market, so are owned by shareholders.

There are different types of savings accounts available and all have their pros and cons, making the choice of what suits you confusing at best. Typically building societies offer higher interest rates when compared to a bank, but banks do offer a broader range of products.

“Best buy” tables available online, or in the financial pages of newspapers and magazines can be a guide but tend to focus on the benefits of being in credit. Remember that the account you choose has to be right for the way you intend to manage your account.

 

Individual Savings Accounts

An Individual Savings Account (ISA) is a tax-efficient account that allows you to save up to a certain amount each year. 

Each tax year, you get an ISA allowance which sets the maximum you can save within the tax-free wrapper from April to April. For the current tax year this is £20,000 for an adult ISA or £9,000 for a children's ISA.

With an ISA you can invest up to the limit in cash, or in stocks and shares, and you can switch your savings between the two should you choose. So, if you did decide to invest the maximum amount, you could divide the money between your cash ISA and your stocks and shares ISA. 

The tax efficiency of ISAs is based on current rules, and the current tax situation may not be maintained. The benefit of the tax treatment depends on individual circumstances.

 

Easy access accounts

Easy access accounts allow you the freedom and flexibility to access your money without needing to wait for a notice period.

You usually only need a small amount of money to open one (some start with just £1) and you have access to your savings whenever you need it, so they’re a great place to keep your emergency funds.

Due to their flexibility, you normally receive lower interest rates with easy access accounts.

 

Notice accounts

Notice accounts are ideal if you don't need to access your funds in the short term. You usually need to give the account provider advance notice before you can take your money out, which can range from around 30 to 120 days.

Notice accounts tend to have higher interest rates than easy access accounts.

However, withdrawing money before the notice period could lose you interest and you might also need to deposit a higher amount to open a notice saving account.

 

Fixed rate or fixed term bonds

Fixed rate bonds are savings account that hold your money for a set period of time known as a term, which could be anything from around six months to five years, or sometimes even longer.

Usually a guaranteed fixed interest rate is applied so you know exactly how much interest you’ll earn over the term.

You will not be able to make withdrawals until the fixed term is up. Depending on the provider, you may be able to withdraw if you decide to through either a loss of interest or other penalties to pay. 

 

Tracker rate bonds

A tracker rate bond has an interest rate that tracks the Bank of England base rate (also called known as 'Bank Rate'), whether it goes up or down. These accounts either follow the same base rate or have a fixed difference above or below.

This means if the base rate rises, the interest rate on these accounts will also go up. However, if the Bank of England cuts the base rate then the interest will go down.

 

Credit cards

A credit card used wisely can help you with cash flow and take advantage of the interest-free payment window. 

However, if you don’t repay your bill in full each month it can be a very expensive form of borrowing. Remember too that forgetting to make a payment, or just paying the minimum amount each month, can have a negative impact on your credit score.

Equally, transferring an existing balance on to a 0% interest card can be a good idea for some. If there is still a balance at the end of the interest-free period, you could of course look to transfer the balance to a new card with another 0% balance transfer offer.

Understanding interest rates

If you overspend and incur an overdraft, you may incur interest charges, especially if you have not cleared this in advance with your bank or building society.

Nowadays regulations ensure the full cost of borrowing or going overdrawn is fully explained beforehand. For savers, the law also requires banks to quote the rate if you held the product for a whole year.

With a loan this is called the APR, the “annual percentage rate”.

For savings it is called the AER, the “annual equivalent rate”.

If you do decide to take out a loan it's important to consider other features, such as how much the repayments cost every month and the length of the loan.

With savings, you may want the option to withdraw interest monthly or leave it invested to receive a higher level of interest.

The APR or AER enables an easy comparison of the loans or savings, so you can see which is the most expensive or cheapest in real terms.