How Do Savings Accounts Work?
Wombat Guide: How savings accounts work
Investment accounts allow you to put your money into a company with the goal of making a profit should that company grow. The money in an investment account can go up dramatically, as well as down by the same token.
A savings account is different from an investment account. With a savings account, your money won’t go down. Instead, it will go up by however much you put into it, plus the agreed interest rate.
First, let’s look at the different types of savings accounts.
Fixed rate savings account
A fixed rate savings account is one which offers a fixed interest rate for the duration of the term (usually a financial year). For example, you might open a savings account with £100 and an interest rate of 2%. After one year, your account would be worth £102.
A Cash ISA is a type of savings account that allows you to save money tax-free up to a certain limit each year. Normally that limit is £20,000.
Easy access savings accounts
As the name suggests, easy access savings accounts allow you to withdraw your money anytime you want, something some other types of savings accounts won’t allow.
Notice savings account
With a notice savings account, you’ll need to give the provider some notice if you plan to withdraw some or all of your money.
Regular savings account
If consistency is your goal, then a regular savings account can be a good idea. With a regular savings account, part of your terms and conditions is that you make a minimum deposit each month. For example, you might have to deposit £50 per month in order to keep the savings account open.
Savings account eligibility
The barriers to entry for a savings account in the UK are normally pretty basic. As long as you have official UK ID documentation, and are over the age of 18, if you can make the initial opening deposit, be that £100, £50, or £10, you can open a savings account in the UK.
If you’re under 18, there are other options for you, such as a JISA or Junior Stocks and Shares ISA, or a young persons savings account, which can be set up with the help of a parent or guardian.
Interest rates on UK savings accounts
Interest rates are the bank’s way of attracting customers to save with them. Interest is what you earn on the money in your account. For example, if the interest rate on your savings account is 3.5%, you’ll earn 3.5% of the total in your account, each year.
Deposits and withdrawals with savings accounts
Check carefully the type of savings account you have, if you plan on having access to your money at all times.
Some savings accounts in the UK are easy-access, meaning you can withdraw your money whenever you want. Others are ‘notice’ accounts. This means you’ll need to give the bank or provider notice that you want to withdraw some money.
Others might have terms that say you can’t withdraw your money at all for the first year, two years, or even three to five years. These are a good option for people who want to save long-term.
Protecting your money in a savings account
Savings accounts are made available by regulated financial institutions such as banks and buildings societies. By law, they must protect your money up to a certain amount in the event that they go out of business.
Normally, the FSCS protects consumers up to £85,000, but you should always check with the savings account provider first.