How to find the right savings account for you

For years, interest rates have been pretty low, meaning potential returns on putting money into savings could be minimal too. 

But all that’s changed – and with over £200 billion sitting in accounts earning no interest at all, you could be getting a lot more money from a simple switch.  

Rising interest rates mean banks and savings providers are once again competing for your custom and offering competitive interest on accounts.  

The top interest rates on cash savings accounts are now above 5%, so they’re finally outstripping inflation (which has fallen closer to the Bank of England’s 2% target in recent months). 

But, even though the savings market has improved in competitiveness, many of us stick to providers where we have current accounts, without looking for better deals elsewhere.  

This means that banks or building societies don’t always need to offer market-leading interest rates to maintain your custom. 

This ‘loyalty penalty’ could mean you potentially lose out on hundreds of pounds in interest, and it can be particularly detrimental if you’re retired and are relying on your savings to keep pace with inflation over the long term.

So, if you’ve not considered switching your account, now might be the right time to start. However, before you just look at the standard savings accounts offered by your bank, take some time to learn about the different options available to you – you might find one that suits your needs far better. 

Get a better deal 

“There are many types of savings accounts that savers are able to choose from,” says Caitlyn Eastell, Spokesperson for finance comparison website Moneyfactscompare.co.uk.  

But it’s not just about finding the account that pays the highest rate. “The right one depends on how flexible you wish to be with your cash withdrawals,” she adds. 

You also need to think about how you manage your account – do you want one from a bank or building society with a local branch, or are you happy to only run it online?  

If it’s the latter you’ll also be able to look beyond the big banking names and consider some of the smaller, but often more competitive, online-only providers.  

You can look at comparison sites to decide which deal works best for you or consider signing up to a savings platform that allows you to switch between the best rates multiple times a year. 

What about cash ISAs? 

The easy-access, fixed-rate or notice accounts we’re talking about here are available as ordinary accounts (where interest may be subject to tax) or cash ISAs (where all interest is sheltered from being taxed). 

Each year you can invest up to £20,000 in ISAs, so unless you have already used your allowance for the year (perhaps in a stocks and shares ISA), it might well make sense to choose a cash ISA over an ordinary account. 

The only other reason not to would be if you can get a better interest rate on your cash in an ordinary account and, importantly, there’s no risk of you needing to pay tax on your interest. 

Currently basic rate tax payers can earn up to £1,000 a year before they start paying tax on interest, while higher rate taxpayers can earn up to £500 with the personal savings allowance. If you pay the additional rate of tax you won’t get any allowance on savings interest, so will need to pay tax on anything you make. 

Easy-access accounts  

You can make withdrawals any time you like with easy-access accounts (also known as instant-access), making them an ideal place to set aside money you might need to call on for big expenses like holidays or to cover emergencies. 

Rates are usually variable, which means they can go up and down in line with changes to the Bank of England interest rate. 

Currently, the best instant-access accounts are paying around 5%, but it’s important to check whether any deal you are considering includes a short-term bonus that only lasts for a year, before dropping to a much lower standard rate.  

These can work well for savers that regularly change savings accounts, but if that’s not something you’d consider, you’ll be better off going for an account that pays a slightly lower rate but will stay around for a while. 

The main disadvantage of an easy-access option is that interest rates are typically lower than other types of savings accounts that don’t allow you to dip in at any time.   

So, while easy access provides a great home for money that you might need to get hold of in a hurry, you might get a better return on an account with more restrictions – especially over the long term. 

Notice accounts  

With a notice account, you must notify your provider when you wish to make a withdrawal. That means you’ll have to be organised with your money but, in return, you should get a higher rate of interest on your savings than you would in an easy-access account (although always shop around first, just to check). 

Typically, you’ll have to give at least a month’s notice, while some accounts require six months’ warning before you take your cash out.  

This might not be a problem if you are planning known expenses like a wedding, house deposit or a holiday, but if you’ll likely need your money in an emergency (for example, the boiler breaks down or your car gives up the ghost), an easy-access account might make more sense.

The only exception to choosing a notice account over an easy-access option offering the same interest rate would be if you're worried about the temptation of dipping into your savings, meaning there’s value in making them harder to access. 

Right now, the best rates on 180-day notice accounts are around the 5.25% mark – but make sure you check out the terms carefully before you sign up to make sure it’s right for you. 

Fixed-rate accounts 

Fixed-rate bonds – or savings accounts – pay a guaranteed rate of interest over a set length of time, irrespective of what happens to the Bank of England base rate. Accounts typically run from periods of 12 months to five years. 

A very important point to be aware of: you may well not be able to withdraw money from your account if you need it before the fix comes to an end.  

If early access to your money is allowed, you’ll likely have to pay a penalty or forfeit some of the interest.  

This means that fixed-rate accounts are only suited to savers who are confident they can afford to leave their money untouched for the duration of the fix – and, crucially, have enough cash on hand for both known expenses and emergencies in other easy-to-access accounts. 

The typical reason for choosing a fixed-rate account is you’re rewarded for tying your money up with a higher rate of interest. 

However, at the time of writing, the best rates are pretty close to those being paid on easy access accounts. You can currently get around the 5.1% mark over a year, 4.7% over three years or 4.5% over five. 

This might not sound like much of an incentive, but with the Bank of England predicted to start cutting interest rates in the middle of this year, you do at least get the peace of mind that you’ve ‘locked in’ a higher savings rate and won’t see your returns fall for the period you’ve signed up for. 

Premium Bonds 

If you pay tax on your savings, or have maxed out your ISA allowance, it might also be worth considering Premium Bonds. 

NS&I Premium Bonds, held by more than 24 million savers, enter you into a monthly prize draw. And not only are your investments 100% protected by the government, but any winnings are also paid tax free. 

The prize rate is currently 4.4%, so if you hold £25,000 in Premium Bonds you should, theoretically, win over £1,000 a year. However, this is the average rate and prizes are not guaranteed.  

If this does sound enticing, anyone can save as much as £50,000 each in Premium Bonds. 

Which savings account is right for you? 

Savings accounts are fundamentally simple products, but the sheer volume of options and terms associated with each – even from a single bank - can easily feel overwhelming.  

Knowing which suits your needs best might feel like it requires hours of thought, and that can slow down your decision. 

But if you haven’t reviewed your savings accounts in the last year or so – or you have too much money in your current account – it’s, at least, worth looking at the rates on an easy access account (with no restrictions).  

While you’ll need to do your research to check that opening a new account is right for you, by choosing a simple, unrestricted option with a better rate than you’re currently getting, your money will be working harder for you (giving breathing room while you decide what to do with your savings over the long term).