The most fundamental difference is how easy it is to get the money out: making a withdrawal. We will cover this first.
How easy is it to get your money out with different types of savings accounts?
To start with, the types of savings accounts can be divided into three basic groups:
1. Instant access savings accounts. These accounts generally allow you to get your savings at any time, with no restrictions on the number times you can take money out. You may be able to move money in and out of these accounts on a daily basis.
2. Limited access savings accounts. These types of savings accounts have some kind of restrictions on accessing your savings. There may be a limited number of withdrawals allowed each year, loss of interest as a penalty for taking money out or a need to tell the bank a number of days in advance they you want to take money out, called “giving notice”.
3. Fixed term accounts. At the extreme end are these types of accounts, which often do not allow any access to take money out until the end of a specific duration, which might be a long as several years. These may also be called “savings bonds”. Some exceptions may exist to allow a withdrawal; you need to check the details for the specific bank account.
Typically, banks offer higher interest rates for more restricted accounts, as a trade-off for the lack of flexibility. These interest rates for limited access and fixed term accounts are often fixed when you open the account. Instant access accounts often have lower interest rates, which can change from time-to-time.
It is also worth keeping in mind that “instant access” may not always mean you can spend the money immediately. Some small banks and building societies transfer the money in a way that can take three working days, if you are moving it to a different bank. If the savings account is with the same bank as your current account this is less likely to be an issue.
Tax may or may not be a consideration for different types of savings accounts.
What about tax?
A different way to think about the types of savings accounts is based on whether the interest is taxable.
1. A Cash ISA is a type of savings account, where the interest is not taxable. These come in instant access, limited access and fixed term forms. There are rules about how much you can contribute to an ISA in a year to keep in mind. More details can be found on the gov.uk site.
2. Premium Bonds, which are unique to National Savings & Investments. These don’t pay interest, but instead randomly award prizes, which are tax free. Technically these are instant access accounts, but in practice it takes about three working days for money to get from the account into a bank. The random prize approach makes it hard to compare these accounts with a bank savings account; Money Savings Expert has more in depth explanation.
3. For all other types of accounts interest may be liable to tax. Most people get tax-free interest savings allowance, which varies based in income, so whether you actually pay any tax will depend on how much interest you earn and your income. HMRC have an explanation of how tax works on interest you can explore.
So now we have covered two of the major differences in savings account, how to go about choosing the right account for you?
Things to consider when choosing a savings account:
- What are you saving for? If saving for big purchase, such as a special holiday, a car or a house deposit, you might know you won’t need the money for months or years, and want to have it “locked up” to prevent spending the money.
- Are you saving on a regular basis, a similar amount each month? Some banks offer regular savings accounts, especially to their own current account customers, with higher interest rates.
- Might you need to get to your savings if you have an emergency, such as a car repair or needing to replace an appliance? Check that you can get hold of the money if you need to, or whether it is really locked-up for a longer period of time.
- Will you likely earn more interest than your tax-free allowance? Consider a Cash ISA if that is the case.
Keep in mind that in addition to savings accounts, there are other options for longer term savings that we won’t go into here: investments and pension savings. This article in the Money Ready Learning Hub outlines three apps that can help you with savings and investments.
Savings accounts can be a vital way to help build some financial confidence, knowing that you will be able to afford that holiday, or an unexpected car repair can bring real peace of mind. When you know the different types of accounts, you can be more confident in picking the best option for your personal goals.