Choosing a Savings Account
If you have surplus income, it makes sense to make it work for you. It is of little use sitting in your current account, as you are unlikely to be receiving a decent rate of interest on it. You should consider, therefore, transferring this money into a savings account. There is a wide variety of packages available for those who wish to save, and they each suit individuals with different financial situations.
Individual ChoiceYour choice of savings account will be determined by several factors. Perhaps the most important of these is whether or not you think you might need quick access to your cash in the event of an emergency. If this is the case, then you should look at instant access accounts. In the past, the best interest rates have been granted to those who agreed to put their money away for a certain length of time. These 'notice accounts' required that you give your bank notice that you wish to make a withdrawal. The period between requesting money and actually getting it can often be up to 90 days, depending on the terms of your account.
However, instant access savings have made these accounts somewhat redundant. It is now possible to open high-interest accounts which come with a cash card, enabling you to withdraw money at any time. However, these often do not offer spectacular rates of interest after tax is taken into consideration. A more attractive proposition in this situation is an instant-access Cash Individual Savings Account (ISA). These are tax-free accounts to which many banks now offer instant access. On face value, ISAs may appear not to offer the best rates when compared to other accounts. However, when you consider that they are tax-free investments, the best ISA rates often represent the best deal.
The down-side of a Cash ISA is that you are only permitted to put away £5,100 in each tax year (for 2010-11). In return, however, you are guaranteed a fairly decent rate of interest and, if your lender has signed up to the government's guidelines, easy access to your money and an interest rate which will be adjusted according to the base rate.
Regular SavingsIf you are financially capable, it may be a good idea to open a regular savings account. This involves depositing a certain amount each month, which can be as low as £5. In return, you will be offered a very attractive rate of interest which may well beat an ISA. This is achieved by way of an annual dividend paid to each saver. You should bear in mind, however, that if you do not make the regular payments you will not be entitled to the bonus at the end of the year. In this way, the package encourages consumers to get into the saving habit.
If you are worried about the security of your money, you could do no better than National Savings. The government offers various national saving packages, the majority of which involve buying bonds. These are essentially loans which you give to the government, and on which you are paid interest and, depending on the bond, a bonus at maturity. These are unlikely to offer the best rates of interest but, as the government is very unlikely to become insolvent, your capital is basically guaranteed.