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Articles » Finance » Investing >> View Article

Guide to Savings Accounts

By: Kate Tee

Need to save cash? Which account is right for you? With Bank of England interest rates at a record low, getting the best possible return on your savings has never been more important. In today's market, it really pays to know your ISA from your fixed-rate bond. Here is a guide to savings accounts to ensure your money is in the right place…

1. Instant access accounts

These accounts, also known as no-notice accounts, enable you to get your hands on your cash without restrictions.

The most recent figures from the Bank of England show the average interest rate paid on a branch-based instant access account has slumped to just 0.17%. But don't despair - you can get up to 15 times this amount by shopping around for the best rate.

GOOD FOR: People who want the security of knowing they can get hold of their money without having to wait. But, you'll pay for the privilege, as these accounts typically offer the lowest returns.

2. Notice accounts

Under these accounts you generally have to provide notice of between 30 and 120 days to withdraw your money. As a result, these accounts may not be suitable for people who think they might need their cash in a hurry, but they do tend to offer higher rates than instant access accounts.

GOOD FOR: People who are confident they could wait for the required notice period.

3. Internet accounts

The overheads involved in running these accounts are lower than on branch-based ones. This is reflected in the interest rates they offer, which are usually higher than on instant-access accounts. Internet accounts often let you withdraw your money without giving notice.

GOOD FOR: Web savvy people who need instant access to their cash but want to get higher returns than on branch-based accounts.

4. Regular savings accounts

Banks and building societies have become increasingly reliant on using savers' money to fund mortgage lending since the credit crunch struck, and this has led to many groups launching regular savings accounts.

Under the terms of the accounts, you agree to pay in a set amount of money every month for a year, although it's sometimes possible to vary the sum. You can't withdraw any of the money until the end of the year, when the interest is added to it and the total is usually transferred to a lower interest account.

GOOD FOR: People who have spare cash to set aside every month and for people who need a little help with the discipline of saving. Not so great for anyone with a lump sum to invest, as the money can only be paid in on a monthly basis.

5. ISAs

The benefits of ISAs shouldn't be underestimated in the current low-interest rate environment. Not only do the accounts typically offer higher interest than instant access and notice accounts, but holders don't have to pay any tax on the returns they receive.

As a result, a higher rate taxpayer needs to earn 1.67% on a normal savings account just to equal every 1% they earn through an ISA, while a basic-rate taxpayer would have to earn 1.25%.

You can pay up to £3,600 a year into an ISA, and with many of the best-buy deals offering instant access to your money, it's hard to see a downside.

GOOD FOR: People who want to save long-term and can afford to lock in money for 12 months.

6. Fixed-rate bonds

These are the accounts that are paying the best return at the moment, with many fixed-rate bonds offering interest of more than 4%.

The reason for the high rates is depositors have to lock up their money for a set period of time, generally between one and five years. Interest is either paid annually or when the investment matures.

GOOD FOR: People whose main consideration is to get the best possible return on their cash.

7. Monthly interest accounts

These tend to be notice accounts upon which the interest is paid monthly rather than annually. The rates paid on the accounts are usually slightly lower than for notice accounts, to reflect the fact you get the interest sooner.

GOOD FOR: Retired people who are using their savings to boost their income. And those hoping to live off returns on their savings, such as during a career break or maternity leave.

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