Savings

A savings account is simply a place where you can put any spare money you may have so that it can earn you a higher rate of interest. This type of account give you the chance to grow your money over time, especially if you can make deposits into the account on a regular basis and leave the balance of your savings to accumulate and earn more interest.

How does it work

With a savings account you can put away any extra money you may have, with the aim of earning more interest. The balance in the account can then be used in case of emergencies or used for specific large purchases, like a holiday. You can deposit some money away into a savings account whenever you wish, whether that's on a regular basis or as a lump sum when you have it available.

A lot of savings accounts are instant access, which means that you can put your money in and get it out whenever you want.

Savings accounts usually have fewer services than current accounts. For example, you don't get a chequebook or a debit card, so you can't make payments from the savings account. Yet some savings accounts do provide you with a card that allows you to withdraw cash from the account via a cash machine.

There are several different types of savings accounts that are available with different features and benefits.

  • With instant or easy access accounts you can get put money in and get money out whenever you need to. They usually offer a variable rate of interest (one which goes up or down) and you can get your money in different ways, such as in a local branch or over the internet. Some offer a cash card which you can use to get money out at a cash machine.
  • Notice accounts may offer better interest but you will have to give the bank notice that you want to withdraw your money. The number of days notice you will need to give ranges from 7 to 120 days. So if you have a 7 day notice account you will have to wait 7 days to get your money, sometimes you can obtain the money earlier, but you may incure a charge or loss of interest.
  • Regular savings accounts are one of the easiest ways to build up a sum of money, whether for a specific purpose or just to have a nest egg ready for a rainy day. They usually require you to deposit the same amount each month for a higher interest rate.
  • Fixed rate accounts offer a rate of interest that is fixed for a certain period of time (usually 1 to 5 years). So for example you can put your money away for a term of one year at a specific rate and you get that amount of interest until the year is over. With this type of account you will not normally be able to get any of your money out until the specific term (e.g. one year) is over.
  • Tax-free savings accounts are called Individual Savings Accounts, and they are tax-free because all returns are paid free from UK income and capital gains tax. There are two types of ISA available; Cash ISAs, where you save into a cash deposit account and Stocks & Shares ISAs where you invest in products such as authorised unit trusts. Your annual ISA allowance is currently £11,280 for the 2012/13 tax year*. Up to £5,340 of this allowance can be saved in a cash ISA and the remainder can be saved in a stocks and shares ISA.
  • Child Trust Funds (CTF) are a Government savings and investment initiative aimed at giving your child a better financial start. Every eligible child born on or after 1th September 2002 will receive a voucher worth £250 from the Government to be invested in a CTF account, which can also work as a savings account to deposit money for the child.

* A tax year runs from the 6 April to 5 April the following year

The key points

  • Savings accounts can be opened in just your name, or if you wish they can be opened with someone else as what's called a joint account.
  • In return for a more attractive rate of interest, some savings accounts will tie your money up for a set period of time, these are called Fixed Rate Accounts. You may be charged a fee or lose interest if you make early withdrawals without giving the required amount of notice, or you may not be able to access your money at all until the end of the term. So make sure you choose an account that suits your needs.
  • Many providers offer special savings accounts for children and young people.

Glossary

Saving may involve some unfamiliar words and phrases.  Here's a quick guide to some of the most common ones to help you.

AER

Stands for annual equivalent rate. This is the rate that is generally quoted as interest paid on savings and investments so that you can compare accounts. It is used to demonstrate what your interest return would be if the interest was compounded  (adding interest on to the balance then paying interest on the new higher balance) and paid annually instead of monthly (or any other period).

ATM

Are 'Automated Teller Machines' which are often referred to as cash machines. You can access your money from an ATM at any time of the day. They also provide you with other basic services, such as balance enquiries.

Balance

This relates to the amount of money in your bank account.

Cheque

A cheque instructs your bank to pay a specific amount of money from your account to another person or organisation. You can also deposit cheques from other people into your account.

Credit

A payment into your account.

Debit

A payment taken from your account.

Deposit

Money you put into your account.

Direct debit

This is an instruction from you to your bank or building society allowing someone to take money from your account. The amount of money taken can vary, but you must be told the amounts and dates beforehand. You can utilise Direct Debits to pay bills automatically from your account on a regular basis.

Fixed Rate

This is a form of savings account which will (in most cases) not allow you to access your money until the agreed term has finished.  The reward for this tends to be a higher rate of interest, which means you generally get more savings back.

Gross

The way interest is paid before any deductions e.g. tax/fees.

Interest rates

Are important because they effect how much it costs you to borrow money and how much you earn on any savings you may have.  Borrowing becomes cheaper when the rate goes down and dearer when the rates go up.  Savings earn less when the rate goes down and more when the rate goes up.

Interest rate

The percentage rate that is paid on every £1 saved or borrowed with the bank.

Individual Savings Account (ISA)

Allows you to save up to £11,280 in the 2012/13 tax year with out having to pay any tax on your returns. Up to £5,340 of this allowance can be saved in a cash ISA and the remainder can be saved in a stocks and shares ISA.

Instant access

This is a form of savings account which enables you to have access to your money without delay.

Net

The amount of interest paid after deduction of income tax (or other fees).

A Payee

When a cheque is made out, the person or organisation that it is made out to is the payee.

PIN

PIN stands for Personal Identification Number and it is the four digit security number you will use when you are taking out money at an ATM or making transactions using your debit card.

Sort code

This is a six-digit number that forms part of your account details and identifies a specific branch of the bank.

Standing Order

A standing order can be set up if you want to transfer a specific sum on a regular basis to another account. This can be used to make regular savings from a current account to a savings account.

Useful Links

Here are some useful links we find helpful and thought you might feel the same.

Tools

Use our savings calculator

Use our budget calculator

Your money guides

Simple product guides

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