The different types of savings account
The savings market has many different types of account, often making it difficult to decide which deal is best for you.
Several factors including how likely you are to need access to your money and for how long you are prepared to tie it up for will affect which kind of savings account you are best suited to. Also ISAs come with a tax-free annual limit (£15,240 for 2015-2016) which needs to be considered when looking at rates of return.
|Cash ISAs (tax-free)||Tax-free savings. You get an annual allowance - it is certainly worth making the most of this.|
|Fixed rate ISA (tax-free)||These accounts pay a guaranteed amount of interest when you leave your money in the account|
|Instant and easy access accounts||These types of accounts can be useful for day to day living costs as well as emergency savings.|
|Regular savings accounts||For saving a monthly chunk of your income. There are often rules about how much you can put in and take out.|
|Fixed-term deposit accounts (aka fixed-rate bonds).||These types of accounts are used for setting money aside for a certain length of time.|
|Index-linked accounts||Similar to fixed-term deposits, but the interest rate changes in line with inflation.|
Cash ISAs (Individual Savings Accounts)
If you are a UK taxpayer, you normally pay tax on interest earned from your savings in line with your usual rate - so you stand to lose 20% or 40% of your return (once you've reached your tax threshold). However, cash ISAs enable you to earn tax-free interest.
Even when Cash ISAs don't offer the most attractive interest rates on the market, their tax-free status does mean they could provide savers with better returns than standard savings accounts.
The limit for a Cash ISA is £15,240 (2015/2016 tax year), which can be made up of cash, stocks and shares, or a combination of both.
ISAs come with attractive tax free savings
Instant access savings accounts
Instant access savings accounts offer you the flexibility to withdraw your money quickly and easily.
Saving in an instant access account is necessary if you might need to withdraw some of the money you've put aside; either for every day costs or for an emergency.
An instant access account may pay more interest than a normal current account, and the money is on hand when you need it.
Notice savings accounts
Notice savings accounts work in a different way to instant access deals.
Instead of having quick access to your money when it suits you, saving in a notice account means you'll have to tell your provider in advance that you want to make a withdrawal.
Some notice accounts demand that you let them know you intend to withdraw money 30, 60 or 90 days ahead - so these accounts are unlikely to suit you if you may need to get at your savings unexpectedly.
If you do make an emergency withdrawal from a notice savings account, you're likely to lose some interest.
Notice accounts are likely to come with variable interest rates - which means it's important to keep an eye on your return.
Regular savings accounts
Regular savings accounts require customers to deposit money each month, without fail - so they are ideal for savers who are just starting out, or who wish to drip feed cash into their account in a disciplined way.
Regular savings accounts may limit the number of withdrawals you can make each year, which means it may not make sense to use one for emergency savings.
You may get a slightly higher interest rate with a regular savings accounts than with an easy access account.
Fixed-rate bonds are savings accounts that offer a fixed interest rate on your cash for a set period of time. While they often come with higher interest rates than instant access, notice or regular savings accounts, opening one will mean giving up access to your money during the term of the bond.
Fixed-rate bonds can extend over one year, two years - even three, four or five years. Generally, the longer you're prepared to lock your cash away for, the higher your return will be.
With a fixed-rate deposit account a fixed rate of interest is set in advance, so you know exactly how much you'll receive.
Index-linked savings accounts are fixed-term deposits. You agree to leave your money in the account for a certain number of years. In exchange, you'll get an interest rate that's linked to inflation.
With an index-linked account you can't be certain what you'll get at the end of the term.