Interest rates on savings accounts aren’t what they used to be. However, if you take the time to compare products, you can give a much-needed boost to your rainy day fund. Here’s what you need to know.
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What types of savings accounts are there?
While it’s a good idea to compare interest rates, it’s important to understand which type of savings account is best for you. There are five main types.
1. Easy access accounts
Easy access accounts allow you can add and withdraw cash whenever you want. Interest rates are variable, so can change at any time. However, if your interest rate drops, you’ll be given enough time to move your money to another account.
Over the past few years, some easy access accounts now limit the number of withdrawals you can make each year, stretching the definition of ‘easy access’. Usually, these accounts offer decent interest rates, so are worth considering if you know you won’t need to access your money more than a handful of times a year.
2. Auto-savings accounts
Auto-savings accounts work through apps and use computer algorithms to automatically save for you whenever you can afford it.
To put it in simple terms, when you download an auto-savings app, it will calculate how much you spend each week. If you usually spend a certain amount each week but one week you spend less than this, the app will automatically squirrel away money for you in a linked savings account.
The idea is that you won’t notice the money leaving your account, resulting in a nice pot of savings at the end of the year.
3. Notice accounts
Notice accounts are similar to easy access accounts. The key difference with notice accounts is that you must give a certain number of days’ notice before withdrawing cash.
The notice accounts offering the highest interest rates typically have the longest notice periods. Some notice accounts limit the number of withdrawals you can make in a year.
4. Fixed-term bonds
Fixed-term bonds, or fixed savings accounts, offer a guaranteed interest rate for a set period of time. With these accounts, you have to lock away your cash for a set period of time. As a general rule, the longer the term you commit to without accessing your cash, the higher the interest rate.
5. Regular savings accounts
As the name implies, regular savings accounts allow you to save on a regular basis – typically between £250 and £500 per month. Interest rates can be fixed or variable.
Many of the highest paying regular savings accounts are linked to current accounts. This means that you’ll have to be a customer of a particular bank to open its linked regular savings account.
For more on these types of accounts, plus Cash ISAs and children’s savings accounts, see our guide to everything you need to know about savings.
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How can I earn the highest interest rates?
Once you’ve decided on a type of savings account, finding a decent interest rate should be relatively straightforward.
Right now, a number of accounts offering true ‘easy access‘ currently pay 0.5% AER variable, including Marcus and Tesco. Both of these accounts include a small one-year fixed bonus. You can earn a higher 0.6% AER variable with Skipton Building Society, but you can only make three withdrawals per year. See our list of easy access savings accounts for more options.
If you’re happy to lock away your money in a fixed-term bond, Shawbrook Bank pays 1.02% AER variable, fixed for one year, while OakNorth pays 1.01% AER. You can earn even higher interest rates if you lock away cash for longer. See our list of fixed-term savings accounts.
If you’re looking for a regular savings account, you can earn 3.04% AER variable and save up to £50 per month with NatWest or RBS as long as you have a current account with either bank. Alternatively, Coventry Building Society is open to all and pays 1.05% AER variable – and you can save up to £500 per month.
Alternatively, if auto-savings are more your thing, you can currently earn up to 1.25% AER with Chip.
Why are interest rates lower than they used to be?
If you haven’t checked the interest rate on your savings account in a while, it’s possible you’re earning a rate as low as 0.01%. This is far cry from the 7.5% interest rates on offer during the 1980s.
Many believe the UK’s interest rate environment is solely down to the Bank of England as it controls the base rate, which currently sits at an all-time low of 0.1%.
The base rate greatly impacts savings rates as a low rate makes lending incredibly cheap. This means banks and building societies don’t have to rely on retail deposits.
However, the Bank of England is facing growing pressure to increase its base rate due to fears of inflation taking off, so better news for savers may be around the corner.