The thinkmoney guide to types of savings account
13th Jan 2012
Savings should be an important part of any financial plan. They provide security for the future, as well as something to fall back on in an emergency. And of course, they can help to make your money grow.
In actual fact, when inflation's particularly high, it's hard to make your money truly grow - because few savings rates keep up with inflation, which means the cost of goods and services is growing more quickly than most people's money is. But saving is still important, and even a low interest rate is better than no interest at all.
Also remember that interest isn't the only thing to consider. When choosing a savings account you should also think about what each type of savings account has to offer. With that in mind, here's our guide to some of the different methods of saving.
Easy-access vs. notice accounts
Before we look at the actual types of savings accounts on offer, it's important to understand the difference between 'easy-access' (or 'instant-access') and 'notice' accounts.
As the name suggests, easy-access accounts make it easy for you to withdraw your money as and when you need it (although there may be a penalty of some sort for this, such as a lower interest rate). Some accounts let you withdraw money as many times as you like, while others may limit you to a certain number of withdrawals in a year. In general, the more limited the access is, the higher your interest rate is likely to be.
Notice accounts lock your money away for an agreed time. One advantage of this is that they can offer a better interest rate than you would get with an easy-access account - and in general, the longer your money's locked away, the higher the rate should be.
Regular savings accounts
These are the 'standard' savings accounts offered by banks and building societies. They can be ideal for people who want to put money into savings regularly but don't necessarily want to worry about the finer details.
An ISA (Individual Savings Account) is a tax-free savings account. There's an 'annual ISA investment limit' of £10,680 in the 2011-2012 tax year: you can deposit up to £5,340 into a cash ISA each year, and an additional £5,340 in a stocks & shares ISA (or alternatively you can put the full £10,680 into a stocks & shares ISA).
Because ISAs are tax free, they should pay more interest than a regular savings account would.
ISAs can be easy-access or fixed for an agreed period - and as we explained earlier, the rates can vary (a lot) accordingly.
In many cases, the most lucrative type of savings account is a fixed bond. All fixed bonds lock your money away for a certain time, but the upside of this is that you should be able to get a much higher rate of interest than you would with another type of savings account.
This could be ideal if you have a lump sum of cash (e.g. an inheritance) that you know you won't need in the next few years (or however long the bond is fixed for).
Premium Bonds are run by the Government's own savings provider, NS&I (National Savings & Investments), which calls them a 'fun yet serious investment'.
Instead of earning interest, the money you place into Premium Bonds will put you into a monthly prize draw for prizes of up to £1 million tax-free - and the more money you put in, the higher your chance of winning. You can cash them in (all or some of them) at any time.
If you're not worried about interest but just want somewhere to keep your money (somewhere that could see you win a lot more!), Premium Bonds could be for you.
Under the mattress
This is a more 'traditional' way of saving for some people, but it's not the safest! Some people prefer to keep their hard-earned savings close to hand, but remember: you won't earn any interest, and you could lose everything if your house was burgled or caught fire, to name just two scenarios.
There are no easy answers to the question of how you should save your money, because everyone's situation is different. Some people would say you should try and get the highest interest rate possible, while others are happy to settle for a lower rate if it means getting easy access to their money when they want it.
In general, everyone should aim to have some kind of emergency savings to help with unexpected costs. If you still have money left over after that, then you might want to consider a savings account that could earn you more interest in the long run.
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