In this article, I will be discussing the different types of savings accounts and key points about each. For more information on this & other financial topics, we highly recommend checking out our Finance Homepage.
Why have a savings account?
- A savings account helps you keep a separate pot of money that you are less likely to access so that you have funds in an emergency or for large expenses that you have been planning for, such as a wedding or holiday.
- Having a savings account would normally mean earning interest (a small amount of money the bank pays you for leaving your money with them) which would be added to your savings account and itself continue to earn interest if left untouched (compound interest). Sadly, interest rates are currently very low and returns on savings are minuscule, especially for the everyday saver.
- Some savings accounts are government schemes, such as the Help to Buy ISA and the Lifetime ISA. Both attract a 25% bonus on the balance (with a few caveats discussed further in this article). The Help to Buy ISA is no longer on offer, therefore, I have only discussed the Lifetime ISA. If you have any questions on the Help to Buy ISA, please drop a comment and I’d be happy to answer them.
Types of Savings Accounts
Instant Access Savings Accounts
This is the most basic type of savings account. Historically, it would attract a modest level of interest, however, this is now minimal and mainly means the account acts as a separate pot of money that you might be less tempted to use. There are no penalties to access your savings and you do not have to give notice. It effectively acts as a separate current account, however, with fewer perks (as interest was the main perk).
A cash ISA is one of 3 types of ISA currently available on the market. The other two being Stocks & Shares ISAs and Lifetime ISAs. The cash ISA is a savings account where the interest earned is tax-free. There is no risk to your money as it is not invested elsewhere. There is a £20k deposit limit across all three types of ISAs (i.e. you can only deposit a total of £20k across one of each type of ISA and can only open one ISA account, regardless of type, each tax year (4th April). Cash ISAs can be instant access (be careful with withdrawals as any attempt to replace the money will count towards the £20k deposit limit), fixed-term or limited withdrawal.
This is the next type of ISA on the market. This type of ISA does pose a risk to your money as you are investing in the ISA provider’s portfolio of stocks and shares or selecting your own stocks and shares on the market. Your balance could go up or down, however, there is more scope for higher returns compared to the current low-interest rate on risk-free savings. Stocks & Shares ISAs are risky, therefore, it is important to fully research the provider you plan on investing with and how diversified their portfolio is. This type of ISA also incurs various types of fees and being clear about these is important to ensure whether the risk you’re taking is worth the expense you will definitely incur. This ISA is one of the types you would be allowed to deposit your total £20k allowance in along with the other types of ISAs.
This ISA can be opened by anyone aged 18-40yrs and has an annual deposit limit of £4k until 50yrs of age. The interest rates are relatively low, however, the attractive 25% government bonus makes this a worthwhile account to open. The government will award a bonus of up to £33k (25% of balance) upon using the LISA to either buy your first home or upon reaching the age of 60yrs of age or upon having a terminal illness with less than 12mths to live. By withdrawing from the LISA in any other circumstance, you will incur a 25% withdrawal charge and forfeit the 25% government bonus. This ISA is designed to help first-time buyers get on the property ladder or help save for retirement. It is important to note that this is a long-term savings account that will incur penalties for accessing your money for any other reasons than those set out by their rules. Therefore, only save what you can afford to day-to-day as you will not be able to access this account in an emergency like an instant-access account.
Fixed-Term Savings Accounts
These accounts are designed to lock away your money for 1, 3, 5 or 10 years for an agreed interest rate. The rates offered on these accounts can be more favourable than instant access as you are not touching your balance for a long time. This also means there is scope for earning compound interest if the interest rate is paid monthly rather than on the lump sum at the end of the fixed term. There is limited access to your money during the agreed term and penalties can be incurred for withdrawing your money during the agreed term.
Purchased from National Savings & Investments, Premium Bonds are a way of locking away your money safely with a chance of winning a tax-free cash prize each month. Your savings do not attract any interest, however, any winnings (which range from £25 to £1m) from their monthly prize draw is tax-free. You do not face any penalty for accessing your money, however, it takes a few days to cash them in and for the money to reach your account. There are also no fees incurred for buying or cashing in your Premium Bonds.
References & Resources
- MoneySavingExpert: Savings Accounts Best Interest & ISA Guide
- Nationwide: ISAs explained
- Gov.uk: Lifetime ISA
- NSANDI: Premium Bonds
- MoneyAdviceService.org.uk: How to save money
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