Guide To Savings Accounts
With a wide variety of savings accounts to choose from it can be tough to come to a decision about which account is best suited to individual needs. There are lots of different products on the market ranging from simple instant access accounts to more complex ISAs and bonds.
This guide is designed to explain more about the savings products that are offered through comparison site Tiger.co.uk.
Instant Access Accounts
For those who tend to dip in and out of their savings every now and again an instant access (also called a "no-notice") account could be a good option. This type of account is designed to allow account holders easy access to their savings and, as such, it can be useful for those occasional rainy days.
Some accounts will place a restriction on the maximum number of penalty-free withdrawals the account holder can make within a given time frame, so it is important to review the terms and conditions before opening this type of account.
Interest rates on instant access accounts tend to be variable, which means that they can fluctuate. The interest rate is usually low when compared to savings accounts where the money is locked in for an agreed period of time.
Like instant access accounts, notice accounts give the account holder access to their money but they require that a notice period is given prior to making a withdrawal. The period of notice required is usually 30, 60, 90 or 120 days. If the notice period is ignored, the account holder will face a penalty. Deposits into these accounts can usually be made at any time. Interest rates on these accounts are also variable and, typically, the longer the notice period the higher the rate of interest paid.
Regular Savings Account
As the name suggests, a regular savings account requires that the saver deposits money into it each month. This type of account can offer a good interest rate compared to instant access and notice accounts but there are limits on how much can be saved and the headline rate only lasts for a year.
Savers normally have to pay in £10 to £500 each month but if payments are missed or the money needs to be withdrawn early, some of the interest may be sacrificed as a penalty.Regular savings accounts are normally set up so that there is no access to the savings for twelve months. After twelve months the money will usually be moved into a standard account with a much lower interest rate.
UK taxpayers have to pay tax on the interest they earn on their savings. Cash ISAs offer a way of saving without having to pay tax on the interest earned and, as such, they are an attractive option for most savers.
Interest rates on standard savings accounts are subject to interest. For example, if the account carries a 3% interest rate, a basic rate UK taxpayer would incur 20% tax on this, so the actual rate applied to the savings would be 2.4%. If the money was saved in an ISA, the full 3% would be paid out, but there is an annual limit on how much can be deposited in these accounts.
Every new tax year individuals in the UK are given a tax-free savings allowance and part of that can be invested in a cash ISA. At the time that this guide was published the allowance was £5,760. (A similar amount can also be invested into a shares ISA).
Cash ISAs do not always have the most attractive interest rates on the market but being tax-free means that savers can often get better returns than with standard savings accounts. A point to note is that as soon as any money is withdrawn from cash ISA it loses its tax-free status.
Fixed Rate Bonds
Fixed rate bonds are savings vehicles that offer a fixed rate of interest on savings for a set period of time and the money is locked in for that period.
These products generally have a lifespan of one to five years and, generally, the longer the savings are locked in, the better the return will be. Savers need to be aware that while it may be possible to release funds from a fixed rate bond, there may well be a hefty penalty imposed for doing so.
Peer To Peer Saving
Peer to peer, or social, savings schemes are fast becoming a popular alternative to traditional savings accounts. These schemes allow savers to invest in businesses or to lend money on the loans market in order to earn a higher rate of interest than the savings accounts offered by banks and building societies can offer. In this situation a saver actually becomes a lender.
Peer to peer lending could appeal to savers who are looking for a higher return on their savings and are open to a little risk. Interest rates paid out vary depending on the risk profile of the business or individual taking the loan and range from around 4% to as much as 18% for more risky investments.
Peer to peer lending companies include:
- Funding Circle
- Rate Setter
- Yes Secure
Both Funding Circle and Rate Setter have products that are offered through Tiger.co.uk.Some companies charge an annual fee to set up and manage the account and lenders need to have their credentials verified to satisfy money laundering rules. Borrowers are credit checked and also have to pass the lending companies’ own credit worthiness checks.
Peer to peer lending is essentially an investment – if the business or individual fails to repay the loan then investors could stand to lose some or all of their investment. Unlike standard savings accounts these companies are not regulated by the Financial Conduct Authority and, therefore, there is not the guaranteed protection of savings up to £85,000 that is provided with other savings products.
Interested in applying for a savings account?
We all know that saving is essential for both rainy days and a bright future. Tiger.co.uk offers a savings account comparison service that compares instant access, notice, peer to peer, bonds and business savings accounts from many different providers. Why not take a look today?