Choosing between different types of savings accounts

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Savings accounts are a place to keep your money and earn interest. Things like interest rates, access to your money, fees and risk can vary between the different types.

Here, we’ll explain the four main types of savings accounts: fixed rate bonds, regular savers, instant access savers and ISAs.

Fixed rate saving bonds

When you put your money in a fixed rate bond, you’re giving up access to it for a certain amount of time – often a year or more. So, you might want to have a separate fund for emergencies.

Fixed rate bonds offer an interest rate that won’t change for a set period. This means you’re protected from drops in the Bank of England’s base rate, which could lower what you earn in interest. But it also means you won’t benefit from any rate rises, which could increase your earnings. You may decide this is worth the risk, as fixed rate bonds typically have higher rates than other savings accounts.

The rate you get may depend on the size of your savings. Some banks use tiers to decide what interest to pay you. For example, you may get an interest rate of 4% for savings of £2,000, but 5% for savings of £5,000. You may need at least £1,000 to open a fixed rate saving bond.

It’s important not to confuse saving bonds with structured deposits, which are often advertised in a similar way. Structured deposits may promise higher returns on your money, but they’re normally riskier.

Savings bonds – good if you:

  • Don’t need to use the money for six months or more

  • Have £1,000 or more in savings (although this isn’t always a must)

  • Want a high interest rate

Regular savings accounts

With a regular savings account, you’ll have to pay in money every month. This usually continues until the account’s term ends (e.g. after a year or two). Payments tend to be anywhere between £10 and £500, depending on the agreement

You may need to have a current account with the bank to be able to open a regular savings account with them. Your savings will often be transferred into the former when the latter closes.

Regular savers often have higher interest rates than other savings accounts. But your rate may go down if you miss a payment or take money out. So, this type of account tends to work best if you know you can put money aside each month.

You may find both variable rate and fixed rate options when looking for regular savings accounts. How much access you have to your money can vary too.

Regular savings accounts – good if you:

  • Can reliably set aside money each month

  • Don’t mind having limited access to your savings for a while

  • Want a high interest rate

Instant access savings accounts

These accounts often pay more interest than a current account, but less than other savings accounts. The upside is you can take out your money whenever you want, without being charged or penalised.

What’s more, you can open an instant access saver with next to no money – and you can save as much or as little as you like. This might not be as motivating as a regular savings account, but it’s more suitable if your income and living costs fluctuate.

Instant access savings accounts – good if you:

  • Don’t have lots of money to open an account with

  • Aren’t sure how much you can save each month

  • Prefer to access your money anytime rather than get a higher rate

Individual Savings Accounts (ISAs)

You can put up to £20,000 into an ISA each year and the interest you earn on it will never be taxed. This used to be a big attraction, but things have changed since a personal savings allowance was introduced across all savings accounts in 2016. This allowance means you won’t be taxed on the first £1,000 of interest each year if you’re a basic-rate taxpayer, or £500 if you’re a higher-rate taxpayer.

With this in mind – and the fact that interest rates aren’t typically high on ISAs – the attraction of these accounts may be declining. But an ISA can still be useful for earning interest over your personal savings allowance.

It’s also worth considering a stocks and shares ISA. This allows you to invest your money while protecting any profits, interest or dividends from tax. You can cash in your stocks and shares ISA at any time. Just remember, you may need to pay charges on the investment. And, as with all investments, there’s a risk you’ll get back less than you put in.

You can take out one cash ISA and one stocks and shares ISA each year. If you like, you can switch to another provider during this time. If you have both types of ISA, you must split your £20,000 contribution between them.

ISAs – good if you:

  • Want to avoid getting taxed on interest you’ll earn above the Personal Savings Allowance

  • Want to invest while protecting interest, profits and dividends from tax (only stocks and shares ISAs)

Tips for choosing a savings account

We hope you’ve found this guide useful. We’ll leave you with a few tips for picking the right savings account for you:

Compare the Annual Equivalent Rate (AER) on savings accounts, instead of looking only at the interest rate. AER will give you a better idea of how much interest you’ll earn, as it takes into account compound interest.

Review your savings account at least once a year to make sure it’s still working for you. If you decide to switch accounts, remember you may pay a fee for closing an account early.

Don’t keep more than £85,000 with one banking group. Anything over this amount won’t be protected by the Financial Services Compensation (FSCS).