Compare savings accounts – which one is right for you?

The world is a bit crazy right now, we’re in a big bout of financial unrest and interest rates are skyrocketing. If you watch the news it’s negativity all-round, but thanks to this unrest, savings and savings accounts in particular have made a comeback over recent months. Yes interest rates have shot up, but this also means your savings account has had a boost, meaning you can earn higher interest when you save money. The best part, you can earn tax free interest up to a certain amount, so we need to take advantage of it.

In this guide, we'll explore the world of savings accounts and other investment options in the UK. Whether you're just starting your journey to financial freedom or looking to diversify your savings, this article will help you make the most of your money when it comes to saving.

What is a savings account?

A savings account is a secure and accessible way to set aside your hard-earned money while earning tax free interest on your balance. It serves as your financial foundation, offering liquidity, safety, and growth for your funds. It's also a great way to earn tax free interest.

Whether you have a short term goal of building an emergency fund or going on holiday, or a long term goal of buying a house or even saving up for retirement, the tools available now can help you get there faster – making your money work for you.

Savings accounts come in all shapes and sizes, there are also additional saving options such as bonds and investments, but this guide will focus mostly on savings accounts. The main differences between each savings account are the interest rates and accessibility. The general idea is, the more accessible you want your money to be, the lower the interest you can earn on it. However if you’re happy to lock some money away, some serious interest can be earned.

Most accounts offer interest paid annually, but some offer it to be earned monthly.

What is the best type of account for savings?

The savings account you choose will be based on your personal circumstances. For example, if you’re a first time buyer, a lifetime ISA will work best for you. If you need instant access to your money, go for an easy access/instant access account. There are also accounts available if you are on universal or tax credits, these accounts help boost your savings.

When choosing a savings account always ensure the bank is covered by the Financial Services Compensation Scheme (FSCS). This is the UK's deposit guarantee scheme that will cover up to £85,000 per person if the bank were to go into liquidation, and £170,000 for joint accounts.

Let’s dive into the different types of savings accounts available, to help you decide which one is right for you.

Instant Access Savings Account/Easy Access Savings

Ideal for those who need flexibility, an easy access savings account also known as an instant access savings account allows you to make unlimited withdrawals at any time without penalties, most also let you top up however often you want. The money is not locked in and these are suitable for emergency funds or short-term savings goals. Be aware that some accounts may have withdrawal restrictions, such as a certain amount of times within a 12 month period, but most of our top picks have instant access.

For a higher interest rate, some may require a minimum deposit, so also double check the fine print. These accounts are usually on a variable rate, meaning if the interest rate changes it will affect your rate at the end of the term. This is the cost of having instant access, but the rates are generally higher than normal savings accounts.

See our best easy access savings accounts for 2023

Fixed Term Savings Accounts

A Fixed Term Savings Account, also known as Fixed Rate Accounts are handy if you have a lump sum and can afford to lock it away for a specific period of time, usually 1 to 5 years. Fixed term accounts offer higher interest rates in exchange for committing to the term, and these rates are usually fixed, which means they won’t change if the interest rates move. This can also let you know exactly how much interest you will earn at the end of the term.

This option is excellent for achieving medium-term goals, but always make sure you can afford to not access the money for a set amount of time as banks may have penalties for removing money before its maturity, and the interest rate could drop or you may lose it all together. If you need instant access to your money, this one isn't right for you.

Notice Accounts

A kind of a middle man between instant access and fixed term, Notice accounts require you to give a specified notice period (e.g., 30 or 90 days) before making withdrawals. So your money isn’t locked up per say, you just need to plan ahead if you need to withdraw it. They offer better interest rates than easy access accounts, making them suitable for those who can plan their expenses in advance. This is worth considering if you know you definitely won’t have to access your savings regularly, but you’re not willing to chance your luck that you’ll never need to access it within the timeframe of a fixed term account.

Cash ISAs (Individual Savings Accounts)

A Cash ISA is mainly for people who have higher saving amounts and want to reduce the UK income tax load. Currently in the UK, if you fall into the basic tax range, you are have a personal savings allowance of £1,000 tax free. If you fall into the higher bracket, you are entitled to £5,000 tax free savings. A Cash ISA allows you to save a higher tax-free amount each year, for 2023/2024 its £20,000. These accounts come in easy access, fixed term, and notice account variations. They are an efficient way to grow your savings and earn tax free interest.

Help to Buy ISAs

Designed for first-time homebuyers, Help to Buy ISAs offer government bonuses to boost your savings for a property purchase. With house prices skyrocketing, the government offers a 25% boost of your savings (up to £3,000) per person. If you’re buying with someone else and have a joint savings account, you are both entitled to the 25% boost. However there are some limitations, such as you can only save up to £200 a month into these ISAs, nevertheless they are an excellent choice if you're planning to step onto the property ladder.

Regular Savings Accounts

For anyone reading this as just a ‘normal’ savings account (like I did initially when I first came across them), it’s not. Regular means saving regularly, don’t let the name confuse you. A Regular Savings Account requires you to deposit a set amount each month and offer higher interest rates than standard easy access accounts. They are aimed at building a regular saving habit, but beware, the punishments if you miss a payment are harsh. There are limits on how much you can save monthly, and the interest is paid at the end of the year, but it’s worth noting that interest is earned monthly based on the amount in the account, so when you do the math of how much interest you’ll earn at the end of it, take that into consideration.

Stocks and Shares ISAs

If you're willing to take on some investment risk, consider a Stocks and Shares ISA. These accounts allow you to invest in a variety of assets, including stocks, bonds, and funds, while still enjoying tax benefits. This is another great example of limiting your tax. Every adult in the UK (over 18 years old) is entitled to a tax free amount in an ISA, for the tax year 2023/2024 this amount is £20,000. If you open a stocks and shares ISA, this means you do not pay any income tax, capital gains tax or dividend tax on any income from investments made in this stocks and shares ISA.

A note on interest rates

Interest rates are one of the biggest things that differs most savings accounts, and it is usually applied in the UK by Annual Equivalent Rate.

Annual Equivalent Rate (AER) means what the rate would be if the interest was paid and compounded each year.

You may see on accounts something like AER gross, gross just means total without any tax being deducted. You could also see something like AER tax free, but remember there are limits to how much tax free interest you can earn.

Other ways to get more from your cash

Fixed Rate Bonds

Fixed rate bonds lock in your money for a fixed period at a fixed interest rate. They offer higher returns than regular savings accounts but lack flexibility. We haven’t touched on investing yet on SavvySistersMoney, so I won’t go into any other detail regarding the stock market apart from the last two examples, but I promise a blog section on this is coming so watch this space.

When choosing the right savings account or investment option for your needs, consider your financial goals, risk tolerance, individual circumstances and time horizon. Diversifying your savings across different accounts can also help you achieve a balance between accessibility, growth, and security.

Your choice of savings account or investment option plays a pivotal role in shaping what your financial future looks like. Take the time to assess your objectives, explore the available options, and consult with a financial advisor if needed. Compare interest rates and do some research on the bank or building society of your choice before choosing. All our savings accounts recommended on this blog are covered by the Financial Services Compensation Scheme, but as always, do your own research. By making smart decisions, you'll be one earning interest left, right and centre and truly making your money work for you!

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