Savings accounts guide

Category: Savings

Savings accounts come in a variety of different forms, but they all aim to build up a lump sum of money which you can use for whatever you like.

You may be saving for a specific purpose, or to build up an emergency fund for those annoying times when your washing machine packs up, or just for a rainy day.

Savings accounts are usually in the form of deposit accounts which pay you interest on the money in the account. Providers will then use that money to lend to other customers in the form of loans, mortgages and credit cards.

In the current environment, savings interest rates have increased as the banks and building societies are desperate to gain funds from customers because they can't borrow from each other.

Most people think of savings as putting a little money away regularly to build up a pot of money. However, there are also savings accounts which accept lump sum amounts and aim to increase the value of these.

Different Types of Savings Plans

There are many shapes and sizes of savings plans:

• Cash ISAs allow you grow your savings tax free.

• Instant access savings accounts (or sight deposits) allow you to get access to your money immediately without any penalty.

• Notice savings accounts (or time deposits) require you to give notice of withdrawal. You'll be penalised by a loss of interest if you can't give the notice period you need to.

• Internet savings accounts are run specifically over the internet. Interest may be slightly higher because the accounts are cheaper to run.

• Savings plans can be on a fixed rate of interest or variable interest basis.

• Specialist Over 50 savings accounts or Children's savings accounts may have certain features which you (or your kids) will benefit from.

• National Savings Accounts backed by the UK Government include a range of tax friendly accounts for adults and children.

• Offshore savings accounts allow you to receive interest gross or even defer it to manage your tax liabilities.

How Savings Providers Make Their Money

There are no charges to set up deposit savings accounts and usually no fees either. Providers make their money by using your savings to lend to other customers at a higher rate.

You may also be penalised for early withdrawals on a notice account which saves the provider from an amount of interest so increasing their return.

Taxation

If you're a tax payer, you'll probably have to pay tax on the interest you earn. The main exceptions to this are Cash ISAs or some National Savings & Investments products. The amount you pay depends on your overall earnings. The 10% tax rate has been retained for low earners, but interest will normally be paid net of the 20% basic rate. If you're a higher rate taxpayer you will need to declare your interest on your Self Assessment form.

If you're a non tax-payer you can usually get interest paid gross if you fill in a R85 form which your provider will give you on request. You'll also need to complete this form to get interest paid gross on children's accounts.

Choosing the right Savings Account

Take a look at our range of savings guides for the pros and cons to each type of savings account.

Find the best savings rates for you - Compare savings accounts

Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.