Having savings makes good sense, but it can be hard to work out which is the most suitable savings account to home your money in.
Some accounts let you withdraw money you’ve put in, others don’t. You pay tax on the interest you get from some accounts, but not on others.
If you’re new to the world of savings, it helps to know a couple of things to look out for so that you don’t end up putting your money somewhere unsuitable for what you’re saving for.
So, here are some of the things to look for in a savings account.
Rate
When you compare savings accounts, whether they’re easy access accounts, fixed rate bonds or cash ISAs, you’ll see they all have an interest rate shown as an Annual Equivalent Rate.
Generally speaking, the higher the rate, the more your money will earn in interest. Make sure to watch out for any bonuses which might inflate the rate for an introductory period, often 12 months.
For example an account paying 3.50% might have a 12 month bonus of 2.50%, which means the rate drops to a less impressive 1.00% after a year. Of course it can be worth taking advantage of this but be prepared to move your money again once the bonus period ends.
Tax
Income tax is payable of interest earned from savings. That means basic rate taxpayers lose 20% of their return, while those in the higher-rate or top tax brackets lose 40% and 50% respectively.
However, if you save your money in a cash ISA, interest is paid tax-free. You can invest up to £5,640 in a cash ISA this tax year (which ends on April 5 2013). If you are a taxpayer, an ISA should therefore be the first port of call for your savings.
Minimum investments
Accounts with the most lucrative looking rates sometimes come with a minimum investment or deposit. Many accounts can be opened with as little as £1, but some require a minimum of £5,000 or more.
Regular saver accounts require that you make at least one deposit per month, so if you can’t commit to putting that money aside each month – a regular savings account might not be the best fit.
Access
Instant access or easy access accounts are straight-forward, allowing you to deposit and withdraw money from the account as you please.
Notice accounts grant you access to you money subject to a notice period, up to 120 days in some cases. Notice accounts typically have higher rates than easy access accounts, but they are less flexible. If you’re likely to need your money immediately then they won’t be suitable for you.
You may be able to earn more with a fixed rate account, often called a fixed rate bond, which pays a set amount for a fixed term. However, most fixed rate bonds don’t allow you to access your money during the fixed term. Some will allow access although there will be a penalty for making a withdrawal – this is usually loss of interest.
The other access issue to consider is how you physically get hold of your cash. Some accounts let you manage your savings online or by phone, whereas others are managed at branches or by post only.
Other things to consider
If you’re planning on investing in an ISA and want to transfer your ISA savings from previous years, you’ll have to pick an account which accepts transfers in.
Also, some ISAs are only available to the provider’s existing customers.
If you have a considerable sum to put into savings, it may be worth spreading your savings over several accounts.
The Financial Services Compensation Scheme protects the first £85,000 you invest in a single institution (£170,000 for accounts in joint names), so if you’re looking to put away more than this in savings you might want to consider spreading it between different providers.