There are several types of savings accounts depending on the limitations or flexibility you need your account to have, but one of the most important factors to consider when choosing a savings account is the interest rate it has.
Here, we’ll take a look at what influences interest rates and what’s considered a good rate to have.
What are interest rates?
Interest is what banks or building societies award customers for depositing their cash with their institution. The ‘Bank Rate’ is set by the Bank of England, and this guides the commercial interest rates banks use for borrowers and savers alike. Interest rates inform you how high of a reward you’ll receive for using a certain bank or account for your saving needs, or rather how much it will cost you to borrow from them.
The higher the interest rate an account offers, the more of a return you’ll see on the money you deposit. If the interest rate, for example, was 2% per year, you’d receive £20 in interest on savings of £1,000. But with the benefits that compound interest offers, meaning your interest earns you interest, you’d actually receive more than this over time.
Getting the best savings interest rate
It’s important to do your research before choosing a savings account, because you want to balance the best savings rate with the flexibility the account offers and whether it suits your needs.
For example, a fixed rate bond may offer the highest interest rate, but if your money is locked away for a set period of time, that might not be practical for you. A regular savings account may also offer a great rate but if you have a large lump sum to deposit, it might not be possible.
Early access savings accounts typically offer a slightly lower interest rate, but they make it easy to access your money quickly and this can be of benefit to some and may outweigh the slightly lower interest rate. Cash ISAs are another option, which protect your savings from taxes up to a certain limit and offer competitive rates.
Where should I save to beat inflation?
Since January 2023, inflation has dropped to 10.1%, according to the Office for National Statistics. Here are some of the accounts paying the most interest on your cash deposits with instant access, notice and fixed-rate options to choose from.
- Regular Savings Accounts – These accounts can offer higher interest rates than other savings products but you often need to have a current account with the same provider. Unlike fixed-rate bonds or instant-access accounts, you’ll likely be more restricted in how much you can pay into these savings accounts, with monthly deposits often maxing out between £250 to £500. The rates offered tend to be payable for a set period, such as 12 months.
- Current Accounts – While there have been rate cuts on interest-paying current accounts recently, many still offer great returns. However, these returns are only applicable to smaller balances, and you need to ensure you pay in the minimum monthly amount to be eligible for interest.
Existing Customer Regular Savers
These accounts are for existing customers and there are several high-earning options. For example, First Direct’s regular saver offers an impressive 7% interest which is fixed for a year and allows deposits of up to £300pm. However, you can’t make withdrawals and if you do, the account will be closed, and you’ll only receive 0.65% interest. If accessibility is essential for you, NatWest offers a similar account with 6.17% rate of interest, but you can save a maximum of £150 per month.
Open-to-all Accounts
These accounts offer slightly lower rates of interest and often let you save less per month, but it does mean you can open a savings account without needing to be an existing customer. Nationwide offers the top rate of 5% for this type of savings account, with penalty-free withdrawals but a maximum deposit of £50 per month. Hinckley & Rugby has a regular savers product with an interest rate of 4.75% on savings up to £500 per month. Withdrawals are permitted but you need to provide 30 days’ notice, so it’s not as accessible or convenient.
Where can I find the best savings interest rate?
Savings rates are constantly fluctuating, based on a variety of factors, so the rate you can accrue on your savings will depend on several elements including:
- The Bank of England base rate – this is the rate the Bank of England charges banks when it lends them money, so it’s a benchmark for interest rates across the whole of the UK. At the time of writing, this rate sits at 4%.
- Terms of the savings account – the longer you can keep your money stored away, the better rate of interest you’ll earn, in most cases. When interest rates are at their lowest, this may not be the case, however, so check the Ts and Cs of your account and consider moving your money if you can get a better deal elsewhere.
- Savings providers’ policies – Some financial institutions offer a higher savings rate than those outlined by the Bank of England base rate to attract new customers, so you might be able to benefit from ‘special offer’ rates. However, these are likely to be for a set period only so pay attention to when those rates end so you can move your money to a better paying account.
There are numerous savings accounts with a wide selection of financial institutions, but doing your research into not only the best interest rate but also the terms and policies of the account is the key to finding an account that offers you the best balance of perks and considerations.
