Types of Savings

Cash savings at a glance

Choosing between savings options is easier than it looks. There are hundreds of accounts, but only a few types of account – some for easy access to emergency funds, some for saving regularly and some for growing your money. Take a look at the table to see which suits you best...

Comparison websites are a good starting point for anyone trying to find a savings account tailored to their needs.

We recommend the following websites for comparing savings accounts:

• Money Saving Expert
• Money Supermarket
• Compare the Market

Remember:

• Comparison websites won’t all give you the same results, so make sure you use more than one site before making a decision.
• It is also important to do some research into the type of product and features you need before making a purchase or changing supplier.

Instant access savings accounts

These are accounts that pay interest and allow you to withdraw money whenever you need it. You can save as little or as much as you want each month. You can often open an account with an initial deposit of as little as £1.

Are instant access savings accounts for you?

Instant access savings accounts are for you if you have spare cash and want to:

• earn a better return than from your current account
• save at your own pace
• be able to withdraw money whenever you want
• not take risks with your money

Risk and return

• Usually offer higher interest rates than current accounts.
• The interest rate isn’t as high as with regular savings accounts or savings bonds, which would lock your money in.
• Your savings will not hold their buying value in the long run if the interest rate on the account is less than the rise in the cost of living – inflation.

Access to your money

You can withdraw money whenever you like.

Charges

You won’t be charged for opening an account or taking money out.

Safe and secure?

Cash you put into UK banks or building societies (that are authorised by the Prudential Regulation Authority) is protected by the Financial Services Compensation Scheme (FSCS).

The FSCS savings protection limit is £85,000 (or £170,000 for joint accounts) per authorised firm.

It is worth noting that some banking brands are part of the same authorised firm.

If you have more than the limit within the same bank, or authorised firm, it’s a good idea to move the excess to make sure your money is protected.

• Find out which banks are part of which authorised firms on the Bank of England website.
• Find out more by reading Compensation if your bank or building society goes bust.

How to open an instant or easy access savings account

You can open an instant or easy access account directly with a bank or building society – most of them will let you open an account either:

• Online,
• Over the phone, or
• By going into a branch.

You might need to have a current account with your bank or building society to open an instant access savings account.

Check with them before you get started.

Tax

Most people need to pay income tax on the interest they receive so basic rate tax is normally deducted as a matter of course from savings account interest.

A new personal savings allowance of £1,000 was introduced in April 2016, removing the first £1,000 of savings income from Income Tax.

Higher-rate taxpayers benefit from a smaller personal savings allowance of £500.

If you’re a non-taxpayer you can ask for interest to be paid without any tax deductions.

Follow the link below to the HM Revenue & Customs (HMRC) website to find out how.

Instant access accounts that are cash deposit ISAs will give you tax-free interest so you won’t lose a penny of your return.

• Read our guide to ISAs and other tax-efficient ways to save or invest.

• Find out how to get Tax-free interest on savings or claiming tax back on GOV.UK.

Remember:

• Comparison websites won’t all give you the same results, so make sure you use more than one site before making a decision.
• It is also important to do some research into the type of product and features you need before making a purchase or changing supplier.

Regular savings accounts

With a regular savings account, you commit to paying in a certain amount each month. In return, the bank or building society gives you a higher interest rate than you’d get with their current account or ordinary savings account.

Is a regular savings account for you?

Also known as ‘monthly savers’ or ‘regular savers’, a regular savings account might be for you if:

• You don’t want to invest a lump sum
• You want to get into the habit of regular saving
• You’re saving for a special event like a wedding or a holiday
• You want more interest than you can get with a current account or ordinary savings account

How regular savings accounts work

Different accounts work in different ways, but with most banks and building societies:

• You usually have to pay into your regular savings account every month – typically between £10 and £500.
• You might have to make a minimum number of monthly payments – often 10 or 11 – and the account might have a fixed term of, say, one year.
• With bank regular savings accounts, you’ll usually need to open a current account before qualifying for a regular savings account and your money will be moved to the current account once the limited term of the regular savings account ends.

Risk and return

At the end of the term, you’ll get back all the money you’ve paid into the account plus the accrued interest.

These accounts usually offer higher interest rates than current or instant access accounts. Some offer a fixed interest rate. With others, the rate is variable.

The interest rate might be reduced if you don’t save every month or if you need to make a withdrawal.

Access to your money

Rules vary between accounts. Some allow you to take money out, but might give you a lower interest rate for that month or for the remainder of the term.

Other accounts don’t allow any early withdrawals.

Check the rules carefully before choosing a regular savings account if you think you might need to access your money during the term.

Charges

No explicit charges unless you withdraw your money early (if withdrawals are allowed).

Safe and secure?

Cash you put into UK banks or building societies (that are authorised by the Prudential Regulation Authority) is protected by the Financial Services Compensation Scheme (FSCS).

The FSCS savings protection limit is £85,000 (or £170,000 for joint accounts) per authorised firm.

It is worth noting that some banking brands are part of the same authorised firm.

If you have more than the limit within the same bank, or authorised firm, it’s a good idea to move the excess to make sure your money is protected.

• Find out which banks are part of which authorised firms on the Bank of England website.

How to get a regular savings account

You’ll need to contact a bank or building society directly. Some accounts are only available online.

Some others, especially some building society accounts, are available only through branches.

If you want a bank regular savings account and don’t have a current account with that bank, you will probably need to set one up.

If you don’t already have any accounts with the bank or building society you choose, you will need to show them ID and proof of your address.

You might also need to show these if it has been a long time since you opened any existing account.

Tax

Previously, if you were a taxpayer you had tax automatically deducted on the interest you earned at the basic rate of 20% from your savings.

However, in April 2016 a new personal savings allowance was introduced. This means:

• Basic rate tax payers can earn up to £1,000 interest on their savings without having to pay tax.
• Higher rate tax payers can earn up to £500 worth of interest tax-free.
• Anyone who earns more than £150,000 a year does not benefit from the personal savings allowance.
• Any interest exceeding your allowance is liable to income tax.

There is also zero-tax band on the first £5,000 of savings interest.

This means that anyone with a total income of less than £16,000 won’t pay tax on their savings.

Find out about tax on savings interest and how to claim back tax already paid on your savings income on GOV.UK.

Cash ISAs

Cash ISAs (sometimes called NISAs) are savings accounts that pay interest that is free of income tax.

When might a Cash ISA be for you?

A Cash ISA is for you if:

• you want to earn tax-free interest on your cash savings
• you are a UK resident for tax purposes
• you are aged 16 or over (junior ISAs are also available).

How they work

The overall limit for ISA contributions in the 2019/20 tax year is unchanged at £20,000.

• With a Cash ISA you’ll earn tax-free interest on your savings.
• You can only open one Cash ISA per year, but it is possible to transfer to another Cash ISA or Stocks and Shares ISA or Stocks and Shares ISA with another provider.
• If you withdraw money from your Cash ISA, you don’t reset your annual limit. For example, say in one year you saved up to the Cash ISA limit and withdrew £1,000. You can’t top up that £1,000 immediately – you’ll need to wait for the next tax year. This is not the case if you have a Flexible ISA (see below).
• A single ISA allowance was introduced in July 2014 for both cash and investments. This means you can divide your ISA allowance between a Cash ISA, an Innovative Finance ISA and a Stocks and Shares ISA in whatever proportion you like.

Cash ISA transfers – the rules

• If you want to change providers – for example, if you find another ISA that is offering a better interest rate - then you must ask your new provider to sort the transfer in order to maintain the tax-free status of your savings.
• Although your current provider is required to let you to transfer your ISA to a new account, your new provider might not accept ISA transfers. Make sure your new supplier will let you transfer your ISA before agreeing to switch.
• Your current provider might charge a penalty for transferring. Check for any fees or charges to make sure transferring is still worthwhile.
• You can transfer your current Cash ISA, as well as your ISAs from previous years. Cash ISAs from previous tax years can be split – with some money going to one provider and the rest to others. However, the full amount you’ve contributed during the current tax year must be transferred to the new provider.
• If you’ve got a Stocks and Shares ISA, you can also transfer money the other way back into a Cash ISA. Previously, you had to sell your investments losing any tax advantages to do so.

Flexible ISAs

ISA providers can offer a flexible facility which will let you withdraw and replace money from your ISA, provided it’s done within the same tax year.

Not all ISAs will let you do this, and you should check with your ISA provider that your ISA has this facility. This flexibility is currently not available for Junior ISAs or the Help to Buy ISAs.

Don’t forget ISA transfers are still required through your product provider to move money from a previous years ISA subscription to keep its tax-free status intact.

Help to Buy ISA

You can no longer open a new Help to Buy ISA. If you already have one you can save into your Help to Buy ISA until 30 November 2029, with a further 12 months to claim your bonus until 1 December 2030.

ISA Rules on Deceased Spouse ISA transfers

If your spouse or civil partner died on or after 3 December 2014, you’ll receive an additional ISA allowance equal to the value of their ISA savings at the time of their death. This means on death, the ISA can be transferred to the surviving spouse, still held in the ISA wrapper for the rest of the surviving spouse’s lifetime. This means they will continue to be able to receive any interest or growth tax-free.

Innovative Finance ISA for peer-to-peer loans

The Innovative Finance ISA was introduced in April 2016 and lets you earn tax-free interest on loans arranged through a peer-to-peer (P2P) investment platform.

Your annual ISA allowance can be split between several types of ISA, but cannot exceed the combined annual allowance limit (£20,000 for the 2019/20 tax year).

Risk and return

• Your original savings are protected.
• You won’t need to pay any tax on the interest you earn. But be aware that if you are a 16 or 17-year-old and the money in your ISA was a gift from a parent, they might have a tax bill under the parental tax settlement rules. For information about the parental tax settlement rules, visit the HM Revenue & Customs website.
• Not all Cash ISAs offer great interest rates. Shop around until you find a good deal.
• Beware of teaser rates that are high for a short period of time before dropping off to a low level. If you find that you’re no longer earning a competitive interest rate, look for a higher rate Cash ISA to transfer into.
• Many Cash ISAs are instant access accounts paying a variable interest rate. But Savings Bonds offering a fixed rate over a fixed term can also be Cash ISAs (with your money being paid into an instant access account once the bond matures). Don’t tie your money up unless you can afford to or you might incur early withdrawal penalties.
• Beware of fixed-term cash ISAs offering very high interest rates. In these structured deposits you are taking a gamble on the performance of an index or a commodity price. You might get no income or capital growth, and charges might be deducted from your capital as any return on your investment is dependent on one or a number of rules, for example, the FTSE 100 index will have to increase by 5% over a 5 year period.

Access to your money

• With instant access Cash ISAs you can withdraw money when you want to.
• With fixed-term Cash ISAs, you’ll get your money back at the end of the period you signed up for (‘the term’). Some accounts allow early withdrawals, but there might be a penalty.

Charges

• If you withdraw early from a fixed-term account, there might be charges.
• Your provider might charge penalties and fees if you transfer your Cash ISA to another provider.

Are Cash ISAs safe and secure?

Cash you put into UK banks or building societies (that are authorised by the Prudential Regulation Authority) is protected by the Financial Services Compensation Scheme (FSCS).

The FSCS savings protection limit is £85,000 (or £170,000 for joint accounts) per authorised firm.

It is worth noting that some banking brands are part of the same authorised firm.

If you have more than the limit within the same bank, or authorised firm, it’s a good idea to move the excess to make sure your money is protected.

• Find out which banks are part of which authorised firms on the Bank of England website.

Where to open a Cash ISA

Cash ISAs are available online, through a branch, by post or over the phone, depending on the product and provider.

What are you taxed when opening a Cash ISA?

Your interest is free from tax unless you are aged 16 or 17 years and the money in your account was a gift from your parent.

In that case, they might have to pay tax if parental settlement rules apply – see above. Tax might change in the future.

Saving for your children

Saving for a child today is a wonderful gift for their future. Not only can they start their adult lives with some savings in hand, but getting kids involved early with saving also helps them learn important lessons about money. Here are some of the savings options for children that can help you start saving.

Children’s savings accounts and savings options for children

• You can set up an account with a bank or building society on behalf of a child. They can start managing their own account once they reach the age of seven.
• These accounts offer a great way to learn how to manage money and help get kids into the savings habit. And some providers will include a gift with the account, like a money box.
• Start an account with as little as £1 for any child aged up to 18.
• In some cases, your child can take out their money whenever they like.
• There are two main types of children’s savings accounts: instant access (also known as easy access), and regular savings.
• With an instant access account, you or your child can withdraw or deposit money at any time. Normally, you get a lower rate of interest than with other account types.
• Regular savings accounts are designed to encourage children to save an amount every month, and often run for a set amount of time, for example 12 months. If you withdraw within that time the account might reduce the interest you’ll get. These accounts usually pay a higher rate of interest than instant and easy access accounts as a result.

Comparison websites are a good starting point for anyone trying to find a savings account tailored to their needs.

We recommend the following websites for comparing savings accounts:

• Money Saving Expert
• Money Supermarket
• Which?

Remember:

• Comparison websites won’t all give you the same results, so make sure you use more than one site before making a decision.
• It is also important to do some research into the type of savings you want and the features it needs to have, for example if you want children to have to wait until a certain age before they can access the savings.

Piggy bank

• A good idea for very young children where the key things they need to learn are that money is not a toy and that you need to keep it in a safe place.
• Help them understand the value of different coins and notes, and that bigger coins aren’t necessarily more valuable.
• It’s also a good chance to start giving your child regular pocket money, with a small responsibility attached like getting weekend treats. This will help them learn that you have to save up for what you want, that you have to make choices, and that when it’s gone, it’s gone.
• Keep in mind that the amount of pocket money doesn’t matter, it could be as small as 5p, because it’s the practice that’s really important. Don’t miss out the responsibility aspect because otherwise your child is at risk of simply collecting money, rather than developing an understanding of how money works.

Junior Cash or Stocks and Shares ISAs (sometimes called NISAs)

• If you want to open a Junior ISA for your child and they already have a Child Trust Fund, ask the provider to transfer the money from the Child Trust Fund into the Junior ISA.
• Cash ISAs can be a good savings option because your child will pay no tax on the interest they earn while Stocks and Shares ISAs are ‘tax-efficient’ because their investment is free from any liability to Capital Gains or Income tax.
• While a parent or guardian must open the account, the money belongs to the child. But they can only withdraw the money after turning 18.
• Each child can have one Junior Cash ISA and one Junior Stocks and Shares ISA during their childhood, but it is possible to transfer each to different providers.
• Junior Cash ISAs work the same way as a savings account, except that the interest is tax-free and the money is locked up until the child is 18.
• Junior Stocks and Shares ISAs let you buy shares, bonds and other eligible investments on behalf of a child. The value of these investments can go down as well as up.
• The Junior ISA limit is £4,368 for the 2019-20 tax year (£9,000 2020-21).
• If the child is aged 16 or 17, they can take out an (adult) cash ISA and save up to £20,000 a year, as well as up to £4,368 in a Junior ISA (2019-20, £9,000 2020-21).

Friendly Society tax-exempt plan

• These children’s savings plans are only available through Friendly Societies. These are mutual benefit organisations, which means they’re owned by their members to work for the advantage of those members.
• You can choose to pay into the plan for between ten and 25 years.
• Money is invested in a share-based investment fund for the term length you choose. The maximum amount you can pay in is £270 a year, or £300 a year if you pay in £25 each month.
• On the maturity date, the child must be at least 16 and you must have paid into the plan for a minimum of ten years.
• The value of these types of investment can go down as well as up. Friendly Society policy charges also apply.
• As long as you continue to pay into the plan for a minimum of ten years, your child won’t pay Capital Gains and Income Tax on any gains or income.
• The tax-free limit of £270 a year is in addition to your annual ISA allowance.

Child Trust Fund accounts

Since April 2015, parents have been able to transfer savings from Child Trust Fund accounts to Junior ISAs.

If a child was born between 2002 and 2011, they might have a Child Trust Fund (CTF). These can be transferred into a Junior ISA.

If the CTF is not transferred, when a child reaches 18 they’ll still be able to access the money.

NS&I Premium bonds

• Unlike other savings or investments, where you earn interest or a regular dividend income, with Premium Bonds you’re entered into a monthly prize draw where you can win between £25 and £1 million tax free.
• On average, 1 in 3 people win a prize each year with a £1,000 investment.
• You can buy them for yourself or on behalf of your child, grandchild or great-grandchild.
• You must be aged at least 16 to purchase Premium Bonds.
• You’ll need to invest at least £25.
• You can keep buying bonds for your child until you reach the maximum holding level of £50,000.
• You can give your child the responsibility of keeping their investment details safe and being involved in the decision about what to do with their money if they win.
• Suitable if you want to buy them as a gift for your child or grandchild under 16 if you’re their parent, legal guardian or grandparent
• Backed by HM Treasury, so all the money you invest is 100% secure.

NS&I Children’s Bonds

Children’s Bonds are no longer on sale. For more information on your options if your child has one maturing soon, please visit our page on Children’s Bonds.

Child pensions

Savings towards your child’s future retirement might not be the first thing you think of when considering the various saving options for your child. But, it does mean they’ll only be able to access this pension money when they’re a far more sensible 55 years old.

• Any parent or legal guardian can set up a pension, and it will automatically transfer to your child once they reach 18. They can then start to contribute to it themselves.
• You could save up to £2,880 tax efficiently each tax year with the government automatically topping up any contribution by 25%. This means your contribution automatically becomes £3,600.
• Contributions over £2,880 in that year are still allowed but you won’t receive any additional contribution from the government.
• Any growth in your child pension like ISA’s is free of tax meaning that it can start to increase very quickly. Like any investment though, it can also go up as well as down.
• For example, assuming you invest the maximum over just 3 years of £8,640 (£10,800 including the government top up), assuming an average growth rate of 8% over 50 years, your Child pension could be worth £582,000 in 50 years with 25% taken as a tax-free lump sum.

Saving for Christmas

After the fun of Christmas is over, many of us are left facing a hefty bill in the New Year. It can be hard to avoid using credit to pay for the festive season but saving in the run up will help soften the blow in January.

Saving versus borrowing for Christmas

It’s difficult to pay for Christmas out of December’s pay packet alone, so it makes sense to save up as much as you can beforehand.

The earlier you start saving, the less you need to put aside each month. Even a small amount over a few months can make a big difference.

Borrowing money to cover your Christmas spend could come at a price in interest and fees.

At best, that could be money used for something far more worthwhile - at worst, it could leave you with debt you might struggle to pay off.

Christmas savings clubs won’t offer you interest on your savings and come with a greater risk than saving through your bank or building society.

Step 1 – Set a budget

The average Christmas spend per household is around £500, which includes food, presents, travel and decorations, among other expenses.

To begin your budget, make a list of family and friends you will be buying presents for and allocate an amount for each person.

If you are hosting dinner then consider how many people will be coming over and how much you will need to spend on food and drink.

From there, you should be able to work out how much money you would need to put away each month.

For example, saving £50 a month from the start of the year will get you £600 to spend at Christmas.

Step 2 – Work out how much to save each month

Treat saving in the same way as you would a bill.

Committing to saving a regular sum each month or week is more effective than simply saying you’ll save whatever you have left over, which might be nothing.

Try to be realistic – it’s better to commit to a manageable amount than to aim too high and give up.

Not sure how much you can afford to save? Start small – put your spare £1 or £2 coins into a jar each week.

If that works, try setting aside a bit more on a regular basis.

Step 3 – Consider starting some new Christmas traditions

Pressure to please loved ones and to give children the perfect Christmas tops the list of reasons people overspend during the festive season.

Consider starting some new Christmas traditions that the whole family can join in with and save some money along the way.

Firstly, start early. Picking up Christmas essentials like crackers or decorations in the sales can mean big savings, sometimes around 50%.

If you know what gifts you need to buy, it can help to pick up an item a month to help spread the cost and save you the hassle of shopping when everyone else is.

You could also embrace the digital age and email Christmas cards to save on postage.

There are lots of free websites that let you create your own cards, with family photos and videos.

First class stamps cost 70p, while second class stamps cost 61p, so if you plan to send 30 cards by email this year, you could save between £18.30 and £21.

A pre-Christmas clear out with the family will help you get in order for the festive season but could also put some money back in your pocket.

Once you’ve put aside anything you no longer want, make some extra cash by selling it online or at a local sale.

If you time it right, you’ll find plenty of people looking for second-hand gifts.

If you’re buying gifts for work colleagues, you could set a limit of £5 to £10.

You could also give something handmade instead, especially if you’ve got a hidden talent - with everyone feeling the pinch, your suggestion might be very welcome.

Step 4 – Decide where to put your Christmas savings

For small amounts the best place might simply be a coin jar. Make sure you transfer it into a savings account as soon as it’s built up to a tidy sum.

Maybe you already have a bank account that lets you set up a separate pot for your Christmas savings goal. If not, open an instant-access savings account.

Set up a Direct Debit or standing order to transfer the amount you’re saving into your Christmas account each month.

Comparison websites are a good starting point for anyone trying to find a current account tailored to their needs.

We recommend the following websites for comparing current accounts:

• Go Compare – This also allows you to use the government-backed Midata tool to securely upload your past transactions for customised current account recommendations.
• Moneyfacts
• Money Saving Expert
• Money Supermarketopens in new window

Remember:

• Comparison websites won’t all give you the same results, so make sure you use more than one site before making a decision.
• It is also important to do some research into the type of product and features you need before making a purchase or changing supplier.

Alternatively, you could look at using a Christmas savings scheme, but they’re not regulated in the way that banks and building societies are.

If the Christmas club you’re saving with goes out of business, you might lose all of the money you put into it.

You’re also quite likely to receive your money back in vouchers, which are not always easy to spend in full and gives you a limited range of retailers to spend it with.

If you’re struggling to open up a bank account for your savings, then consider speaking to your local credit union.

They’re more likely to offer you a higher rate of return on your savings than a Christmas club.

Sharia-compliant savings

Sharia-compliant accounts provide the same day-to-day banking services as mainstream current accounts. However, they don’t give you a return on your money or offer overdraft facilities as the principle of paying or charging interest is against Islamic law. Any money invested will be kept separate from other bank accounts – it won’t be used to generate interest or be invested in prohibited businesses.

When might a Sharia-compliant account be for you?

A Sharia-compliant bank account is for you if:

• You want to bank according to Islamic law.
• You want your savings to grow through Sharia-compliant profits, not through interest.
• You don’t want your bank to lend your money to businesses that provide goods or services – such as alcohol, tobacco and gambling – that are against Islamic principles.

How Sharia compliant savings work

With a Sharia-compliant savings account, instead of lending out your savings and charging interest then passing some of this on to you, the bank uses your money in a way that’s consistent with Islamic beliefs.

Your bank will follow the advice of a panel of Muslim bank advisers to make sure that profit-generating activities are Sharia-compliant.

Some of the profit the bank earns from these activities is returned to you, allowing you to grow your savings without earning interest.

Where to get a Sharia-compliant savings account

These banks offer Sharia-compliant accounts to customers in the UK:

• BLME.
• Al Rayan Bank
• UBL
• Gatehouse Bank

Help us keep this list up to date – if you provide Sharia-compliant savings products to retail UK customers, please contact us.

How secure are Sharia-compliant accounts?

Cash you put into UK banks or building societies (that are authorised by the Prudential Regulation Authority) is protected by the Financial Services Compensation Scheme (FSCS).

The FSCS savings protection limit is £85,000 (or £170,000 for joint accounts) per authorised firm.

It is worth noting that some banking brands are part of the same authorised firm.

If you have more than the limit within the same bank, or authorised firm, it’s a good idea to move the excess to make sure your money is protected.

Find out which banks are part of which authorised firms on the Bank of England website