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How to pick the best savings account

This guide shows you how to get the most from your cash by explaining how the different types of savings accounts work. 

 

by Victoria Bischoff on Feb 01, 2012 at 12:51

Other banks and building societies may offer a rate guarantee. While easy access rates are usually variable, a rate guarantee is essentially a promise that your interest rate will not fall below a certain amount for a set period of time and often relates to the Bank of England base rate.

What if you want to earn a better rate?

If you can afford to lock your money away for a longer period of time, you may find you can earn a more competitive interest rate by opting for a fixed rate savings account or fixed rate bond, as they are also known.

A fixed rate saving account is an account that guarantees savers a specified rate of interest on their money for a set period of time. These accounts often offer higher interest rates than easy access accounts, and provide savers with protection against a sudden drop in their interest rate.

To invest in a fixed rate savings account you usually need to lock your money away for at least 12 months. However, some fixed rate deals require you to tie up your money for as many as two, three or even five years. As a general rule of thumb: the longer you are willing to fix for, the higher your interest rate will be.

What happens if you need to withdraw my money?

If you withdraw your money before the lifetime of the deal expires you are likely to be hit with a penalty charge or lose a large amount of the interest you have earned.

Therefore, if you think there is a chance you will need to access your cash before the fixed rate term finishes, you should think twice before opting for this type of savings account.

You also need to consider what interest rates are likely to do over the next few years. If you think interest rates will soon be on the rise, for example, it may not be the best idea to lock your money into a five-year deal.

How much money do you need to invest?

The most competitive fixed rate deals usually require you to make an initial investment of £1,000 or more.

You may also find that some fixed rate accounts only allow you to deposit a one-off lump sum rather than let you drip feed your money into your account over an extended period time. 

If you don’t have a large sum of money saved up you may find that an easy access account which allows you to start with anything from £1 upwards and top up with additional amounts whenever you want is a better fit for you. It may also be worth checking to see what regular savings accounts are on offer because, as the name suggests, these are designed for people who would prefer to save smaller sums of money at regular intervals.

Don't forget the ISA

Meanwhile, if you have not yet used your ISA (individual savings account) allowance for the year it is crucial you do this first. Usually, a basic rate taxpayer loses 20% of any interest they make on their savings to the taxman, while higher rate tax payers lose 40%. If you save in an ISA, however, it will act as a protective wrapper and you will receive 100% of the return on your investment. To find out more about what an ISA is and how it works, check out our ISA explainer guide and video.  

Best Savings Accounts

Regardless of which savings account you decide to go for, however, remember that it is important you regularly review your account and switch to a more competitive deal if your rate plummets. An easy way to do this is to use our 'No Kickbacks' Best Savings Accounts tool. Powered by Moneyfacts, it lists the best rates currently available for each different type of savings account. It is totally independent as we receive no money whatsoever if you go on to choose an account from our tables.

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