What are the alternatives to an instant access savings account?
Easy access ISAs
Easy access cash ISAs are just like easy access savings accounts, but all the interest you make is free from income tax. This tax break is less attractive to many since the introduction of the personal savings allowance, which means basic rate taxpayers can earn up to £1,000 in interest a year without paying tax and should generally should only consider an easy access ISA if it’s offering a better rate than a traditional savings account. However, higher rate payers only get a £500 savings interest allowance, while additional rate payers don’t get any allowance at all.
High interest current account
Ahigh interest current accountcould be a good alternative to an easy access account as there are some accounts on the market offering very competitive interest rates.If you have money sitting in a current account with 0% interest and you can meet the terms and conditions to have an account with a higher rate of interest, then this is also an option worth exploring.
Fixed rate bonds
If you know you won’t need your money for a while, you may want to consider a fixed-rate savings account. These lock your money away for a set period, typically between one and five years. In return, you benefit from a higher interest rate than you can get with an instant access account. However, if you need to access your cash early, you’ll usually face interest penalties and/or exit fees.
Regular savings accounts
With a regular savings account, you promise to save a certain amount of cash, say between £25 and £250, every month for the next year. Making this commitment generally allows you to access better interest rates than with an easy access account and is also a good way to get into a regular saving habit. Withdrawals are usually not allowed. However, some accounts will let you make one cash withdrawal per year, so check for this if you think you might need to access your savings.
Notice savings accounts
These accounts allow you to make withdrawals but only after giving notice. The amount of notice you have to give will be pre-agreed and could be anything from seven to 180 days. So, think carefully about whether you might need your money in an emergency, and how quickly you might need to access it if so. The longer the money is locked away, the better the interest rate you’re likely to receive.
Investment accounts
One problem with savings accounts is that they typically pay less than inflation, which means the purchasing power of your savings is eroded over time. So, if you’re saving for the long term (more than five years), you might want to consider investing your money. A well-diversified portfolio can generate returns that beat inflation over time. However, there are risks, and volatility means that your balance will fluctuate, and you could even end up with less than you saved. If you are going to invest, consider a stocks and shares ISA so the returns are tax-free.
