Different Types Of Savings Accounts
Not sure what savings account type would suit your requirements? We have, in this article, listed down the available bank account types, and their working mechanisms, so that you pick the right bank account option for yourself.
The savings account market is brimming with different kinds of bank accounts, which has made the decision to pick a specific account variant much more difficult and perplexing.
There are many factors influencing what savings account type would suit you the best, which includes your taxpayer status (UK or non-UK), how long would you want your money to be locked, and how often will you be accessing the stashed money.
If you’re a taxpayer in the United Kingdom, you must supposedly remit the tax amount on the interest received from your savings account, which is in line with the typical rate. This means you may end up losing anywhere between 20 to 40 percent of the return to tax. But, Cash Individual Savings Accounts (ISAs) let you earn interest tax-free.
For the majority of people, cash ISAs would be a more sensible option to go with for safely parking their savings.
However, and quite understandably, cash ISAs aren’t known for their attractive interest income, especially when compared to other savings accounts. But the tax exemption means the account holders end up receiving more as returns.
There is an upper limit to the amount of money one can deposit every year in an ISA – for the 2016/17 tax year, the limit was set at £15,240, which could be a combination of cash, shares and/or stocks. If you’d like to save more than the maximum amount, you would have to go with another account type.
Beginning 6 April, 2017, the allowance for an ISA account would be pushed up to £20,000 every tax year.
Finding the Best Cash ISA
To locate the best interest rate, have a head-to-head comparison of gross (prior to tax) cash ISA interest rate and the net rate (post 20 percent tax) you’d get from a traditional savings account.
Remember, if you’re paying tax at a higher rate, your net interest earnings from a standard savings account would go down further than the advertised net rate, since you’re legally obliged to remit 40 percent tax on any amount of interest earned.
In case you’re a non-taxpayer, paying tax on the interest earned from any savings is not mandatory. This means you need not hold funds in an ISA in case a standard bank account provides an increased gross rate.
Instant-Access Savings Accounts
Instant-access accounts function staying true to their name: they let you withdraw cash from your account easily and quickly.
Some of these accounts are accompanied by a plastic card, which could be used for withdrawing money from ATM or cash machines. Quite a few provide over-the-counter (OTC) withdrawals and several let you transfer the funds online from your account to another account sans penalty.
Instant-access account savings turn out a sensible option if you’re in need of some of the money set aside. This savings account type is perfect for stowing away emergency savings so that you can have easy access to money during crisis periods.
Instant access drawbacks to be aware of
Remember, some of these instant-access accounts provide more immediate withdrawal options comparatively. If your savings account is operational only through phone or the Internet, it is likely that any transfers or withdrawals made could take some days to realize.
These accounts could also have a withdrawal limit per year sans an interest loss. Therefore, do not forget to check.
Although several instant-access accounts provide introductory bonus rates to customers for 12 months, instant-access savings accounts are usually variable rate arrangements. Post the introductory bonus period, the interest rate payable on your savings could plummet.
It is recommended to closely watch the returns earned by your instant access account, and if needed, make a move to a fresh savings account with a higher rate.
There’s a difference between notice savings and instant-access savings accounts.
In place of being able to quickly access the money whenever needed, a notice account saving means you would have to inform your service provider beforehand about any withdrawal you’re likely to make.
In some cases, you are expected to put in the notice 30, 60, or even 90 days before wanting to withdraw the money. This makes the notice savings arrangement not ideal for people who’d like to access their money during emergencies or within a few days after the need arises.
Making an emergency notice savings account withdrawal is not impossible, but you would end up losing some interest.
The Notice Interest Rates Aren’t Like They Were Before
Back in the day, notice accounts offered higher rates of interest than instant-access accounts. However, that isn’t the case anymore. Therefore, prior to activating a fresh notice account, check whether you could receive the same interest rate on your savings sans any access restrictions.
Notice accounts are also based on variable rates of interest, which again means you should be wary of the returns you get and make a savings account switch if there’s a better deal on offer elsewhere.
Regular Savings Account
A regular savings account requires its users to deposit funds every month in their accounts, which makes this account type perfect for people who are just starting to save, or individuals who prefer depositing a small amount regularly over a time period.
These accounts could have yearly withdrawal limits, making this savings account type not ideal to save for emergency requirements.
Moreover, a standard savings account could likely prevent you from investing in excess of a specific amount every month – restricting you from depositing additional funds in your bank account whenever you want to.
The returns from a regular savings account are not always what they look like
Some of these accounts provide attractive interest rates. However, it is crucial to remember that since your funds would be gradually building up, your total return could be more modest.
For instance, if you deposit £1,200 in the account for a year as monthly £100 installments, you would not receive the headline interest rate on the whole amount. This is because only the payment for the first month will remain in the regular savings account for a complete year.
Instead, you would receive interest on savings as they build up gradually. This means your earnings post those 12 months would be lesser compared to the earnings you could have made had you deposited the funds in one shot.
This is precisely why a traditional savings account isn’t the right option if you’ve got a big sum of money to deposit – even though the interest rate advertised could seem difficult to resist.
Variable and Fixed Regular Savings Rates
Going with a lower interest rate savings account that lets you put in large amounts at once could be a sensible choice if you save money and have a good amount of funds available for deposit.
Also, do not forget to confirm the interest rate nature (variable or fixed) prior to getting a regular savings account opened.
A fixed-rate bond is a savings account that doles out a fixed rate of interest on your money for a specific time period. While these usually come with higher rates of interest compared to instant access, regular savings, or notice accounts, opening an account would mean relinquishing access to your funds when the bond’s active.
A fixed-rate bond could last for more than a year or two – even up to five years. Typically, the longer your funds get locked, the better your returns are.
Though it is possible to withdraw your money from a fixed-rate arrangement during an emergency, you would most likely end up paying a big penalty for doing so. Therefore, putting your money in such bonds is recommended only if you’re sure you won’t require access to the funds when the bond’s active.
A fixed-rate bond investment helps safeguard your savings return in a falling interest rate environment. However, you could even end up on the opposite side of things. This means if your money is locked up in the bond just prior to the rates rising, your money would not benefit from the hike.
Several fixed-rate bonds need big initial deposits. Therefore, if you’re just starting to save, a suitable deal may be hard to find. Moreover, certain fixed-rate bonds let you invest only a single lump sum upon opening the account, and additional deposits are not permitted during the bond’s term.
This makes this savings arrangement not ideal for people who’d like to contribute to their savings over a specific time period.
Help to Save Accounts
Fresh “help to save” accounts would surface in the next couple of years, providing low-paid employees a maximum of £1,200 government bonus.
Workers getting working tax credits or universal credit can save up to £50 every month and get a 50 percent, £600 worth bonus post two years. Later, they could opt to save for two years more, with an additional £600 bonus up for grabs.
Overall, the account holders could create a £3,600 pot over a four-year period, with the government contributing £1,200.
The withdrawals would be permitted to cover urgent expenses and there won’t be any limitations or rules on how the savings should be used at term end.
The government hasn’t yet consulted on the implementation part of this savings scheme. However, a concrete development is expected in this regard by April 2018 or earlier.
If you’ve got quite a few expensive debts to take care of, seriously consider going through our guide on 10 ways to clear off debts.