The ultimate guide to savings: Regular savings accounts, ISAs, instant-access savings accounts, fixed rate bonds and notice accounts

If you’re struggling to figure out where to stash your cash, our guide should help you figure out whether a traditional savings account, fixed-rate bond, notice account or an ISA is right for you.

Finding the best savings account for you

Establishing a decent savings pot should be a priority, but with so much choice, how do you make sure you find the right account for you?

Before you even research which savings accounts are on offer, you need to consider how long you're planning to save as well as what you're saving up for.

The best account for you may differ from someone else’s as it depends on whether you’re saving up a deposit for your dream home, for a much-needed holiday or a rainy-day fund.

We have compiled our ultimate guide to savings that should help you decide where to stash your cash.

Short-term savings

If you want to build up a savings pot over the short term (less than one year), you should consider these products.

Man saving money. (Image: Shutterstock)

Regular savings accounts

Regular savings accounts can offer inflation-beating interest rates, although you need to be confident you can save a set amount every month to qualify or the rate will usually be withdrawn.

What's more, regular savings accounts will usually only allow you to save for a set period after opening the account under a generous rate, which tends to be for one year only.

If you withdraw money or close the account early, you’ll probably end up with a worse interest rate.

Regular savings accounts are not ideal if you have a lump sum to save as they tend to be restrictive in terms of the maximum amount you can tuck away.

Looking for the top regular savings accounts? Check out the best regular savings accounts.

Compare savings accounts, ISAs and peer-to-peer investments (capital at risk) at loveMONEY

Instant-access savings accounts

Need easy access to your cash? Instant access savings accounts allow you to gain access to your money whenever you want – but the interest rate is lower compared to a regular savings account.

You should make sure you do your research on instant-access accounts before applying.

Some banks offer ‘bonus’ rates with a temporarily higher interest rate (usually for a year), but these are often similar to accounts offering no bonus.

Unfortunately, some instant-access accounts with the best interest rates on offer may restrict how many times you can withdraw cash or the amount, so be sure to check before you apply.

The best instant-access savings rates

Cash ISAs

Cash ISAs can offer decent interest rates and are useful as you can stash up to £20,000 of your savings tax-free every year.

You can currently open an instant-access Cash ISA if you want easy access to your cash, a notice Cash ISA (requiring notice before taking money out) and a fixed rate Cash ISA.

Fixed-rate ISAs involve you putting your money away for a certain period of time for a better interest rate. But you may potentially risk missing out on a potential interest rate rise.

One of the benefits of a ‘flexible’ Cash ISA is that you can withdraw money at any time without reducing your annual tax-free allowance.

If your Cash ISA is not flexible, you will not be able to put back in as much as you withdrew.

Compare savings accounts, ISAs and peer-to-peer investments at loveMONEY

Cash sign next to money. (Image: Shutterstock)

Notice accounts

You can use a notice account if you want a higher interest than an instant-access savings account and are happy to wait a little while for your money.

Before you withdraw any savings, you will need to notify your provider. Notice periods can vary from as little as seven days but can rise to over 120 days.

There may be restrictions over how many withdrawals you can make, so ensure you do your research first.

You may also need to stump up a minimum account to open a notice account, which could be a hefty amount.

The best savings accounts for monthly interest

Automatic savings apps

Intimidated by trying to figure out how much to save?

An automatic savings app may help by calculating how much you can afford to save and putting it in a savings account for you.

Automatic savings apps that are currently on the market include Tandem, Plum, Chip and Cleo.

These apps work in different ways but tend to do one or more of the following:

  • Predict how much you can save and transfer the amount to a different account automatically;
  • Round up your purchases to help you save a set amount of income every week

You should find out how much interest you’re earning on your savings, how safe the app is and where your money is being kept.

It’s also essential to check whether your money is protected by the Financial Services Compensation Scheme (FSCS) before signing up.

The downside to automatic savings apps is that the interest rate (if there is one) is generally pretty poor compared to other savings options.

You should also note that many banks now offer similar auto-saving features, so you don’t necessarily have to use one of the above providers.

Automatic saving: why apps could make us all great savers

Medium-term savings

If your savings goal is more ambitious and your funds are going to need a home for over a year and up to five years, you could opt for products with more generous interest rates or even bonuses.

Fixed-rate bonds

If you’re happy to lock up your money for a few years, you could benefit from a guaranteed set amount of interest.

Interest rates for fixed-rate bonds are usually more generous than other savings accounts (with the exception of some regular savings accounts).

You can choose between a range of fixed periods from as little as one year to over five years.

Of course, make sure that you won’t need any of the funds you intend to put into a fixed rate bond before opening an account.

Discover the best fixed-rate bonds in this article.

Couple with new house keys. (Image: Shutterstock)

Lifetime ISAs

The Lifetime ISA, which is ideal if you want to save for a house deposit, can either fall into medium or long-term savings depending on how long you are planning to save for.

Regardless of the time horizon, Lifetime ISAs are worth considering if you want to buy a home as you get a 25% bonus on your savings from the UK Government – worth up to £1,000 a year.

Of course, there are some restrictions.

You must be aged 18 or over but under 40 to open a Lifetime ISA and there is a limit to how much you can put in annually until you turn 50, which is £4,000.

You can hold cash and/or stocks and shares in this type of ISA.

But you should avoid the latter if you plan to buy within a few years as stock market fluctuations may negatively hit your savings and you may be unable to recover the value of your investment.

Beware of the 25% penalty if you choose to withdraw money from your Lifetime ISA unless you are:

  • Buying your own home;
  • Are aged 60 or over;
  • Or are terminally ill with less than a year to live

If you want to find out more information, check out our guide on Lifetime ISAs.

Which ISA is best: Cash, Stocks & Shares, Innovative Finance, Lifetime, Help to Buy or Junior?

Help to Buy ISAs

It’s worth mentioning Help to Buy ISAs even though they are only available until 30 November 2019.

The Help to Buy ISA can be used by someone looking to buy their first home.

Similar to the Lifetime ISA, the Government will boost your savings by 25% although you can only save £200 a month (with the exception of the first month, which is up to £1,200).

You can save less with the Help to Buy ISA compared to the Lifetime ISA and the money cannot be used as a house deposit.

One positive aspect is you don’t have to worry about any penalties for withdrawing your money.

Help to Buy: how it works, whether you’re eligible and how to pay it off

Help to Buy mortgages explained

Which ISA is best: Cash, Stocks & Shares, Innovative Finance, Lifetime, Help to Buy or Junior?

Long term savings

If you’re looking to build a savings pot over a period of more than five years, the below options may be right for you.

As we’ve mentioned before, be sure to research any terms and conditions before committing to anything.

Little girl with coins. (Image: Shutterstock)

Junior ISAs

Looking for a long-term savings pot for your child? A Junior ISA (JISA) could be useful as it offers a long-term, tax-free savings option for your child.

The current savings limit for the 2019/20 tax year for JISAs is £4,368.

In order to qualify for this ISA, your child must be under 18 and living in the UK or you must be a Crown servant with a child that depends on you for care if they live outside the UK.

Similar to other ISAs, you can invest in cash and/or stocks and shares.

One of the benefits of using a JISA as early as possible is that you can smooth out any disappointing returns from a volatile stock market performance – and can benefit from compounding.

For example, if you make contribute £4,368 into a JISA when your child is born, your child could receive £8,330 when they turn 18 (based on 5% annual growth) according to Foresters Financial.

You should note funds cannot be withdrawn until your child turns 18, after which it turns into a normal ISA.

Looking for a top paying Junior ISA? Check out the best Junior ISAs 2019/20

Which ISA is best: Cash, Stocks & Shares, Innovative Finance, Lifetime, Help to Buy or Junior?

Stocks & Shares ISAs

Are you happy to hold an investment for at least five – or even 10 – years?

If so, a Stocks & Shares ISA may be the right savings vehicle for you.

With a Stocks & Shares ISA, you can hold various investments including:

  • Investment trusts;
  • Individual stocks and shares;
  • Corporate and Government bonds;
  • Exchange-traded funds (ETFs)

Any investment growth or interest earned is free of tax and you can pay in up to £20,000 in the current tax year.

Stocks & Shares ISA: how does it work, 2019/20 limit, how to invest, fees, cheapest providers and more

Stocks and Shares ISAs: is your investment protected?

Compare your investment options at loveMONEY (capital at risk)

Premium Bonds app. (Image: NS&I)

Premium Bonds

Premium Bonds have surged in popularity over the last few years as the opportunity to win tax-free prizes is a huge draw for many savers.

While these bonds don’t pay any interest (meaning the value of your money can decline in real-time), you will be entered into a monthly prize draw.

Tax-free prizes up for grabs, which range from £25 to £1 million.

You can invest from as little as £25 – and get a unique bond number for every £1 you pay.

Unfortunately, your odds of winning big are pretty slim at 24,500 to one.

Buying Premium Bonds: easiest way to purchase bonds online, by phone, by post or as a gift

NS&I Premium Bonds: how winners and prizes are picked

NS&I Premium Bonds: how to buy, cash in, claim lost prizes and more

When are your savings taxed?

It can be frustrating trying to figure out if (or when) a savings product is taxed, so we’ve revealed everything you need to know in this section.

Firstly, you can earn some interest on your savings without paying any tax, which is known as the Personal Savings Allowance (PSA).

This allowance is £1,000 for basic rate taxpayers and £500 for higher rate taxpayers, while additional rate taxpayers have no PSA.

If you exceed the allowance, you will pay tax on any interest at your usual rate of Income Tax.

So, if you are a basic rate taxpayer earning over £12,500 up to £50,000, you’ll pay 20% in tax.

For higher and additional rate taxpayers, you’ll pay 40% and 45% tax, respectively.

The PSA applies to interest from:

  • Bank and building society accounts;
  • Savings and credit union accounts;
  • Investment and unit trusts;
  • Open-ended investment companies;
  • Peer-to-peer lending;
  • Trust funds

Some savings in tax-free accounts do not count towards your PSA, including ISAs and some National Savings & Investments accounts.

With most ISAs, the maximum you can save tax-free is £20,000 in the 2019/20 tax year.

But you can split your allowance between different types of ISAs every year.

So, if you max out the Lifetime ISA allowance of £4,000, you can then split the remaining £16,000 allowance between a Stocks and Shares, Innovative Finance and Cash ISA if you want to.

Premium Bonds don’t pay any interest, but you do have the opportunity to win tax-free interest.

Tax-free savings: Cash ISAs vs the Personal Savings Allowance

 

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