Savings Account Options in the UK

For a while now it has felt as if managing one’s personal finances have moved from a rather modest, cautious approach towards a more aggressive, adventurous one. Get-rich-quick-or-not-at-all even.

And there are quite a few reasons for this assumption, too. More and more people look to grow their finances by investing, rather than holding them in the kitchen cabinet or under a mattress. Equity, real estate, even cryptocurrencies attract many. And no wonder. Unlike previous generations across the developed world, future retirees face a most troublesome truth. In order for one to retire in comfort, there can be little to no reliance on state funded pensions. Therefore, masses turning towards high-yield investment options make utter sense.

But, does it mean that more traditional, lower-yielding investment options have lost their purpose entirely? Well, actually, not at all.

And here’s why

Talking heads and various industry specialists will scurry to tell you how you shouldn’t save money in times of high inflation, as your savings are bound to lose value quickly. And, while savings accounts do offer an interest rate for your deposits, it often fails to even reach the inflation rate, much less surpass it. In fact, the average interest rate on a typical savings account is so low these days, it would take you about 200 years to double your investment. And that’s not taking account of the inflation rate, at all.

However, the very reason why interest rates for savings accounts are so low is what makes a savings account so attractive. Your deposit truly is saved, so to say. While an equity investor might be gambling with his investments in a way, your investments and the corresponding interest rate (should you choose a fixed rate account) are both fully guaranteed. So, while inflation might slowly and steadily chip away at your wealth, you can be sure it won’t succumb to a sudden dip in equity or cryptocurrency price. And that isn’t so bad after all, especially if you’re putting money aside for a short-term or long-term goal, or even just building an emergency fund.

If you want your savings account to have some flexibility and give easy access to your money, you may want to choose an easy access account. These accounts work exactly how they sound. You may access your savings when necessary without penalty (unless there’s a limit to the amount of withdrawals per savings period, after exceeding that, you may incur an interest penalty on your account). You may also add to your savings account whenever you wish. However, easy access does have a price and that price usually is lower interest rates or AER (Annual Equivalent Rate – the interest yield for a year of savings).

Notice accounts will, on average, have higher AERs than easy access accounts, but that will cost you your easy access component. A notice account requires the saver to put in a notice a certain period before the intended withdrawal of funds. These periods range between 30 and 180 days. To break the notice period and gain access to funds earlier, the saver would typically pay a fee. For example, forfeit the interest for the broken notice period.

Regular savings accounts, also known as ‘regular savers’, provide the highest interest yield, but they also come with nearly the most restrictions on deposits and withdrawals. The limits of these accounts include:

• time limit;
• maximum investment limit;
• deposits shall be made periodically (like once a month).

These accounts require you to make regular, smaller deposits instead of making a single lump-sum deposit. This will reflect towards the total interest earned, since you would be making monthly payments, meaning that the interest rates would apply only to funds already deposited.

Only fixed-rate bonds outperform regular savings accounts in terms of interest rates. And restrictions, too. Using these savings accounts may mean giving up access to your funds for up to several years. The good news is, that the longer you’re prepared to wait, the higher the reward. These deposit periods typically vary between one to seven years or more. That’s quite the commitment, so pay close attention to the rising bond rates. You’ll want to have the best ones!

Tax allowances are another reason to remain faithful towards savings accounts. In particular, Individual Savings Accounts or ISAs. We’ve gone over them before, but in short – ISAs are accounts that offer anyone and everyone a tax free savings allowance (£20,000 per tax year 2022/2023). Any interest earned on this annual amount is tax-exempt and can be a valuable asset towards building your wealth. ISAs come in all shapes and sizes (well, not really), but there are multiple options. Cash ISAs are most similar to other savings accounts. However, interest rates are usually smaller for cash ISAs, so make sure to follow these rates closely to find the best one.

As the UK often seems to be ahead of the curve in terms of savings options and rates, there’s a special, government sponsored bonus option saved for the end – ‘Help-to-save’ accounts. This scheme is available to low-income workers that have a household income equivalent to at least 16 hours a week at the national living wage rate – £659 per month, and working tax credit.

Participants can save up to £50 per month and receive a 50% tax-free bonus after two years, worth up to £600. After the initial two years, participation can be extended to two additional years, garnering an additional £600 bonus. So, over the course of four years, the total amount would come down to £3600, with the government tax-free bonus being £1200.

This program is intended to promote savings, therefore early withdrawals could affect the overall bonus amount, when the account matures.

Savings accounts are what we deserve, but not what we need right now?

It’s no secret that inflation rates soar high at the moment. Savings account interest rates are, quite the opposite, at an all time low. Mostly due to the low base rate of the Bank of England, heavily influenced by, first, the 2008 financial crisis and, second, the coronavirus pandemic. Due to this reason alone, if you’re looking to build your wealth, you would probably do well to steer clear of savings accounts and rather invest your money in a higher yield option, like stocks or cryptocurrencies. Even bond interest is on the rise, which means that a long-term investment in bonds can be more bountiful than a regular savings account.

However, if you’re looking to build a nest egg or an emergency fund in a more safe and/or accessible way than the stock market or cryptocurrencies, savings accounts could be the right option for you. It’s important to understand that selling stocks or other investments at a low might prove to be less desirable than paying a fine for a withdrawal. And, while interest rates are lower than ever, savings accounts still offer a guaranteed and safe return as opposed to the stock market, especially in the short term. In order to get the best deal, compare rates and account specifics to your actual needs.

Also, remember that ISAs offer a great way to accumulate wealth tax-free (that means – much quicker) and should not be overlooked as a savings option, even though the interest rates don’t seem as high initially.

In conclusion – inflation rides high and savings accounts with their meagre rates might not seem like a great idea, but what fits one, might not fit the other. Set your financial goals, educate yourself on options available and who knows, maybe a savings account is the hero you need right now.