The differences between savings accounts explained
Got some cash? Want to save it? Want to earn some interest too? Here are the basics you need to know.
1. CURRENT ACCOUNTS
Normally they’ve been very poor for saving money, but right now the interest rates are among the best. Read our 6 Ways to Make Your Bank Account Pay article to find out more and some of the top picks.
The bonus of a current account is you can access the money at any time.
2. TAX-FREE SAVINGS IN A CASH ISA
Woah. Tax-free? You mean I get normally taxed on my money? Nope. You normally get taxed on any interest your money earns (see our 9 Interest Basics) but with a Cash ISA (Individual Savings Account) you can earn interest gross (this means without tax deducted).
There is a limit of how much you can put into a Cash ISA each year. For 2014/15 this will be £5,940. However, you can open new ones each year and keep earning interest on the old ones – though you may have to transfer them to get better rates. Always transfer rather than withdraw and pay into a new account. When you withdraw from an ISA you lose the tax free benefit – this doesn’t mean your money or interest is then taxed, just that you can no longer earn interest tax free unless you put it towards that year’s limit.
You can also invest another £5,940 tax free in a Stocks and Shares ISA.
From July 1st, ISAs were replaced by NISAs with a personal yearly allowance of £15,000. Read more about ISAs and NISAs.
3. SAVINGS ACCOUNTS
Savings accounts have much higher limits. You shouldn’t invest more than £85,000 in the same bank as if they were to go bust you’d lose any money above that. Some banks share financial responsibility, which means the £85,000 is spread across accounts in all their banks (e.g. HSBC and First Direct).
You can often get better rates if you FIX your money for a number of years. However this means it can be difficult to access it if you need it (you’d probably lose some of the interest earned to that point) and rates could rise.
4. REGULAR SAVINGS
These savings accounts often give much higher interest rates, but there’s a reason for that. You can only put money in once a month, and you’ll probably need to do this each month for 12 months (when the account normally closes). Payments are usually capped at £250 or £300 (though some are higher), so if you can only save a certain amount each month this is perfect for you.
It get’s a bit complicated when trying to figure out how much interest you’ll earn. You can only earn on what’s in the account, so to start that’s only a few hundred quid. By the 12th month, you get interest on all 12 payments, and the interest already earned. A quick trick to give a rough estimate is work out the average amount in the account at any time (roughly half the final amount) and then apply the interest rate.
If you have a lump sum, put it into best rate account you can, then drip feed it into one of these IF the rates work out better.