How to choose a savings account

Friday, 12 March 2010 12:00

It makes financial sense to squirrel money away in a high-interest account, letting it gain value just by being there.

Even if you cannot spare a lot of money, you can make sure that whatever you can put aside is working to its best advantage and efficiency. Over time, it could grow to a substantial amount.

There are, however, a few factors to consider when searching for a savings account.

High interest rates are an obvious attraction, but you will need to think about some other matters as well, such as your personal circumstances.

First of all, look to see whether it is actually the best course of financial action for you.

If you have expensive or high-interest outstanding debts, it may be better to clear them first before saving your money for a rainy day. They could mount up faster than your savings balance can.

Should you decide that a savings account is indeed best for your situation, think about whether you want a fixed or variable rate.

Remember that if the interest rate is lower than inflation, on either a fixed or variable account, your savings will lose value against the real price of things.

Think about whether you want to make deposits in your savings account on a regular basis, or in lump sums.

Regular deposits may get you better rates.

You will also need to look at how sure you are that you can go without access to your savings for a year or longer.

Higher rates may be available on accounts that lock your money away for a long time, but this is not the best option if you will need to make withdrawals in that time.

Instant access saver accounts can be good for people who may need to get to their money without warning.

Notice saver accounts may penalise you if you need to make a withdrawal quickly.

Some saver accounts impose limits on the number of withdrawals you can make and others may hold back the interest you would gain in any month where you take money out.

Look out for high introductory rates, as they may drop sharply once the initial period is over. Make sure you understand how much interest you will really gain over the lifetime of your savings account.

If you are over 50, or opening a savings account for a child, specific deals are available that you should research.

Offshore savings accounts may allow you to defer the interest on them for tax benefits and National Savings Accounts are backed by the government.

If you are comfortable with using the internet, online savings accounts are worth considering.

Since they cost the providers less, there can be some attractive rates and deals available with them.

Consider any conditional or unconditional bonuses that internet accounts offer.

Unconditional bonuses will run for a prescribed period of time – check how what the benefits are and how long they last.

Conditional benefits may apply if you hold a current account with the same institution or do not make any withdrawals in a certain time period.

You could also look at getting a cash ISA, which are popular as they allow you to accrue untaxed interest.

Certain limits apply to ISAs. They are restricted to £7,200 every year and £3,600 is permitted in cash.

You will still not be taxed on interest if you withdraw money from a cash ISA, but you cannot return the balance after taking it out.

Additionally, you may have only one cash ISA with one provider every tax year.

However, all people aged 16 or older get a new cash ISA allowance every April when the tax year starts again.

It is a good idea to compare providers of cash ISAs, not just for their current rates, but for the rates they have offered in recent years.

This way, you can see who is likely to show the most consistency.

Key points to remember when choosing a savings account are to think about what your saving and withdrawing patterns are likely to be and what your personal circumstances are.

By keeping these in mind, and not only looking at the rates available on deals, you can help yourself to finding the best offer for making your money work hardest for you.

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