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What to look for in a savings account

19th July 2019

Saving money can help you become financially secure and provide a safety net in case of an emergency. Like all elements of financial planning, it pays to be strategic in your choice of savings account. Here are seven questions to ask when choosing your savings provider and account.

Will I earn interest? 

You’re likely to be saving for a specific goal or purpose (such as a property deposit) or simply as a back-up/rainy day fund. Whatever your reason for opening a savings account, it’s great if you can grow your savings via interest as well as simply keeping that money safe. Interest rates offered on savings accounts are rarely more than 1% but that’s better than nothing. 

Can I take money out? 

If the objective of your savings is to act as an emergency fund, you’ll want to make sure you’ll be able to withdraw your money if and whenever you need it. Check that it’s an easy access account to ensure you can access your money, should the unexpected happen and you need the money quickly. 

Tip: Even when an account is marketed as easy access, don’t assume that you’ll be able to withdraw funds as you please. Some accounts come with limits on the number of withdrawals you can make in a year for example. Read the small print and check if any restrictions would be manageable for you. You don’t want to exceed these if there are any because you could be charged a penalty such as loss of interest on the amount withdrawn. 

Could a notice account work for you?

These accounts require the saver to let the provider know in advance that they wish to make a withdrawal. Notice periods vary but they range from around 30 days to 120. The main reason people opt to save in a notice account is that they can offer slightly higher returns than instant access accounts, however the difference in returns offered is usually fairly minimal. 

If having immediate access to your savings isn’t top of your priority list and you need help being disciplined in your savings, you might want to consider a notice savings account. One benefit of this type of account is that it removes the temptation to withdraw money as and when you want to.

Look out for the bonus trap

Watch out for short-term interest bonuses which disappear after the first year. A lot of savings providers offer accounts promising returns, but only for the short term. 

Tip: Opt for an account with a bonus but set a reminder for when the bonus disappears so you can move your money then, otherwise you could end up earning small returns. 

Do I have enough money to save?

Savings accounts usually come with a minimum investment limit, but many can be opened with just £1. As a general rule, the greater the initial deposit you’re required to make, the higher the returns. So if you’re fortunate enough to have a big lump sum to put into savings,  focus on accounts with higher minimum investment limits.

Tip: The Financial Services Compensation Scheme (FSCS) only offers protection for the first £85,000 per saver, per banking institution. So spread your savings around if you have a substantial amount to invest. Also remember that some accounts have a maximum investment limit, meaning you can’t pay in more than a certain amount.

Fixed rate accounts

With most savings accounts, the bank can increase or reduce the interest rate it pays. With a fixed rate account, it can’t. Instead, the interest rate is fixed for the term of the product – typically between one and five years. The bank normally pays the interest once a year, but – with some accounts – you can choose to have interest paid monthly. You may be able to get up to 2.05% interest on one-year fixed rate savings accounts and up to 2.70% on five-year fixed rate savings. 

What’s the catch? Usually you can’t take money out of a fixed rate savings account before the term is up – or if you can, you lose some of the interest. Also, with some accounts you can only pay in money at the start of the term. Generally, you have a limited time after you open the account to pay money in (this varies between providers) then after that, you can’t top it up. 

Fixed rate accounts can be a good option for those who already have a chunk of money saved. Perhaps you’re looking to spread your savings (as mentioned above) or the bonus period on your savings account has expired and you’re looking to get a better interest rate.

What about ISAs? 

With a fixed rate cash ISA, any interest you earn on your savings is tax free. With a fixed rate account, interest is paid without tax being taken off but that doesn’t mean it’s tax free. To find out the difference between a fixed rate account or bond and fixed rate ISAs read this post by Virgin Money

With your savings covered perhaps you’re now looking to invest. Gain independent advice on what investment options are available to you. Get in touch with our team for honest, professional investment advice.

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