LOOKING to boost your rainy day fund? We take a look at the best paying savings accounts on the market.
Savers can still put away a tidy sum, despite the Bank of England holding interest rates at a record low of 0.1%.
From fixing leaking pipes to purchasing a new car or luxury holiday, a savings account can have plenty of uses.
It can provide a pot of money to cover emergencies or help you reach savings goals such as paying for a new car or holiday.
Building a savings habit can also help you budget so you can stretch your pay packet beyond just your bills.
What is a savings account?
A savings account is a product offered by banks or building societies that pays a fixed or variable rate of interest over a set period.
It is separate to your main current account so money is put aside and can grow rather than being used to pay bills or for a round of drinks at the pub.
Savings accounts are offered by all of the main banks and building societies as well as online and challenger brands.
How does a saving account work?
Savings accounts work in a variety of ways.
Some require a minimum monthly deposit or you may just need a certain amount to open the account and then can put in as much as you like.
A savings account will have a fixed or variable rate of interest.
A fixed rate pays the same amount, usually each year, over a set period such as one, two or five years.
Providers may also offer variable accounts where the rate on offer can change at any time.
You can either make a one-off lump sum deposit into a savings account or setup a direct debit from your current account to regularly transfer money.
This can be a beneficial way to build up a savings pot as you can just set it up and forget about it while your money grows.
Interest is usually paid either monthly or annually and goes back into the product, which helps grow your money.
You may be taxed on the interest you earn.
However, there is a personal savings allowance that lets basic rate taxpayers earn £1,000 of interest tax-free and higher and additional rate taxpayers are allowed £500.
Any interest above this will be charged at your marginal rate.
For example a basic rate taxpayer earning £1,200 from a savings account wouldn’t pay any tax on the first £1,000 but would pay 20% or £40 on the £200.
You can earn interest tax-free instead by opening an Isa.
What are the different types of savings accounts?
There are several ways to put money into a savings account.
The most popular are easy access accounts, which usually pay a variable rate of interest that can be changed at any time but you are able to access your money whenever you want without any penalties.
Similarly, some savings providers offer notice accounts with limited withdrawals either a set number of times each year or after a certain period.
Alternatively, a regular saver lets you make monthly deposits into a savings account, usually with a minimum and maximum amount.
The best savings rates can usually be found on fixed rate bonds. These pay a set rate of interest over a defined period such as one, two or five years and you get your money and interest owed back once the product term ends.
How to choose the right savings account
Putting money aside for any reason is always a good thing.
It is good to have a plan for what you are saving for though as this will help you choose the best savings account for you and ensure you are getting the best out of your hard-earned money.
Experts tend to recommend a rainy-day fund of three months of expenses to cover emergencies, such as if you lose your job or need to pay for house repairs.
An easy access account may be the best place for this if you need to be able to get to the money whenever you wish.
If your savings goals are more long-term, such as for a mortgage deposit or wedding in the next few years, then it may be worth putting money in a fixed rate account.
This would help you earn more interest and stop you spending the money.
Some accounts may have minimum and maximum limits so bear this in mind when choosing an account.
Also think about how you want to manage your savings account: some only allow contributions in-branch or over the phone while others will let you put money in online.
Don’t forget that only up to £85,000 of savings are protected by the Financial Services Compensation Scheme (FSCS).
This protects your money if a bank or building society goes bust.
If you are saving more then it may be worth spreading it across different institutions.
The protection applies per institution, so if you have £85,000 with Lloyds you wouldn’t get protection on anymore money that you put into a savings account with Halifax as both are part of the same banking licence.
How to open a savings account
Check with your provider how to open an account.
You may be able to open an account online, by post or you may have to go into a branch.
Some accounts may only be available if you also have a current account with the same provider.
To open an account, you will usually need to provide your name, date of birth, full address and contact telephone numbers.
You may have to supply proof of address, such as a passport or driving licence if you don’t already have an account with the provider.
Once your application is complete you will receive an account number that you will need to keep in case you have any queries.
Can I open a savings account online?
There are plenty of online-only banks, plus many of the main high street banks will let you open savings accounts through their websites.
You can enter your personal details by completing an online application form and you will need to setup a username and password to login to your account.
There may also be an app where you can access your savings and make contributions from your smartphone.
How many savings accounts can I have?
There is no limit to how many savings accounts you can have.
Just make sure you can keep track of where all your money is going.
Savings rates can change all the time so money you have in an old account may be paying less than new ones.
This may make it worth transferring money and closing old accounts.
Alternatively, some older products could be paying higher interest so it may be worth topping these up if the rate changes on other accounts you have.
You could have a savings account for your rainy-day fund and then different accounts linked to your goals, such as saving for a holiday or mortgage deposit.
How to close a savings account?
If you are registered to manage your savings account online then you can usually close it by logging in through your provider’s website.
Alternatively, you may have to phone your provider or visit a branch.
There may be a penalty to pay if you are still in a fixed period and some accounts may require a notice period.
You will need to decide where to transfer any remaining money in the savings before your account is closed.
Are savings accounts safe?
Your money will be safe as long as you open a savings account with a regulated bank or building society.
You can check what your provider is regulated for on the Financial Conduct Authority register.
Regulated firms, including savings providers have to follow rules on making product terms clear and there is FSCS protection which covers up to £85,000 of your money if a bank or building society goes bust.
Watch out for online scams as some fraudsters may pay for ads that appear high up in search results offering savings accounts but often they are not regulated and there is no FSCS protection.
Are savings accounts worth it?
The interest rate offered on savings accounts is linked to several factors.
This includes the Bank of England base rate, which is currently at historic lows of 0.1%.
The base rate is one of the main indicators for pricing products, so if it is low there is less incentive for banks to offer a decent rate.
Pricing may also depend on how much a bank or building society wants to attract new deposits.
This may make putting money into a savings account seem like a waste of time.
But saving something is better than nothing.
You can earn more interest than just leaving money in your current account.
Additionally, a savings product makes your pay packet go further by boosting your earnings and helping you reach personal goals.
Some savings accounts may also help you beat inflation, which is the measure of the cost of living.
If the inflation rate is higher than interest earned on money in your bank account then its value is being reduced as you are effectively spending more on bills than what you are earning.
Putting money into a savings account can help beat inflation if you can find a high enough rate. Or it can just be a useful way to stop you spending all your spare cash.
How much should I have in savings?
The amount you have in savings depends on your goals.
Experts recommend a rainy-day fund of at least three months of expenses to cover emergencies such as if you lose income or have to fix a burst pipe.
Work out your monthly expenses such as mortgage or rent costs and how much you spend on essentials such as food and electricity.
If you spend £3,000 a month on these bills you would need £9,000 in savings.
Setting a savings goal can help you decide how much you need to put away.
For example, if you are saving for a car, work out when you want it, how much you need, and how long it would take to get the required amount based on your income.
You can then decide how much interest you need to earn and the type of savings product you should put your money into.
How much interest will I get on £1,000 a year in a savings account?
The amount of interest you can earn in a savings account depends on the type of product.
Easy access accounts tend to have lower rates.
The best savings rates are usually in fixed deals, but you have to lock up your money for longer and there may be penalties for withdrawals.
If you found a rate to match inflation, currently 0.4% in March, a basic rate taxpayer would earn £3 a year, dropping to £2 for higher earners.
Savers also benefit from the Personal Savings Allowance (PSA).
This lets basic rate taxpayers earn £1,000 in interest a year tax-free from their savings.
Higher-rate taxpayers get a £500 allowance.
How to find the best joint account for savings?
It may be worth opening a savings account in joint names with someone if you have shared savings goals.
This could be an account you share with your spouse to save for a holiday but it doesn’t have to be a relative.
It could be a boyfriend, girlfriend or flatmate where you both transfer money for rent or to buy a property together.
Most providers will let you open any savings account jointly.
They will need to see ID from both account holders.
This has benefits as it boosts the amount you can save, and your personal savings allowance (PSA) is shared with someone else so that gives you more money you can put elsewhere within the allowance.
There are risks though, as you need to be clear about how much each person is contributing and consider what would happen to the money if you change your goal if you or the other person needs to access the money or you get divorced.
Where can I put my money instead of a savings account?
A savings account is just one option for growing your money.
You can also earn interest tax-free with an Isa.
Everyone has a £20,000 annual allowance that can be spread across a Cash Isa, Stocks and Shares Isa, Lifetime Isa and Innovative Finance Isa.
It may also be worth topping up your pension or if you have a large sum you could take out a buy-to-let mortgage and earn rental income by becoming a landlord.