Types of savings account explained

With so many different types of savings accounts now available, it is difficult to know which one to choose. The sort of account which is best for you is dependent upon several factors - for example, whether you need instant access to your money, how long you can tie your cash up for and whether or not you pay tax.

Savings accounts most commonly fall into one of the five types of accounts detailed below:

• Easy Access/ No Notice Accounts
• Notice Accounts
• Bonds or Term Accounts
• Regular Saving Accounts
• ISAs and Tax-Free Accounts

Instant Access or Easy Access Accounts

These types of accounts offer instant access to your money without the need to give any notice, pay a financial penalty or forfeit interest. They are ideal for people who wish to save money but may need access to the cash at short notice. Due to the flexibility of these accounts the interest rates offered are normally slightly lower than other types of accounts.

No notice accounts can be operated via a branch, telephone, post or the internet, but do bear in mind that while some high-interest telephone and internet-based accounts claim to offer instant access, you may have to wait a few days while a cheque is sent out or a transfer is made to your current account.

It is prudent to check your rate at least every three months to ensure that you are getting the best return on your savings.

Notice Accounts

Notice accounts generally earn a better rate of interest but require you to give a certain amount of notice before withdrawing funds to avoid any penalty. The amount of notice that needs to be given depends on which account you choose.

These accounts are becoming less attractive as instant access accounts have become more competitive and allow you to withdraw your money immediately.

Bonds or Term Accounts

For many savers, the most important aspect of any investment is knowing that their money is safe and secure. If this applies to you, then bonds or term accounts could be what you are looking for. Bonds or term accounts are high interest savings accounts which offer the most competitive interest rates but which require your money to be tied up for a specific period of time. The interest rate on most accounts is fixed from opening the account until the maturity date.

The money in the account is tied up for a specific length of time, usually between 1 to 5 years and you are not usually allowed to add further funds to your initial deposit once a bond has been opened.

Most providers do not permit any type of withdrawal before the maturity date and if withdrawals are allowed then a penalty will normally be incurred.

Regular Savings Accounts

This type of account is aimed at people who can commit to making regular savings and deposit money into the account each month. A certain number of monthly payments have to be made into these accounts each year to prevent loss of interest or closure.

They often pay superior annual rates of interest by giving savers an annual bonus payable as interest on top of their interest rate. However, with some accounts, if you fail to make the required deposits you will lose the annual bonus.

Some accounts limit the amount you can put in each month and most accounts limit the number of withdrawals you can make each year, so they aren't much good if you need access to your money quickly.

ISAs

Any individual aged 16 and over who is resident in the UK for tax purposes is eligible to open to an Individual Savings Account (ISA). You can choose to save in a cash ISA or invest in an equity ISA (stocks and shares) or a combination of both.

The returns from these accounts are free of income tax and capital gains tax, but the maximum cash investment permitted per tax year (April 6th - April 5th) is £3,000. An equity ISA, also known as a maxi ISA, allows you to invest up to £7,000 allowance in stocks and shares or to combine your stocks and shares investment with cash. You cannot have both a maxi and mini ISA in the same tax year.

Withdrawals may be made from the account, but once the maximum amount has been deposited in any year, no further deposits will be permitted that year, regardless of how much is withdrawn.

While cash ISAs do not always offer the highest interest rates in the savings account market, after tax you will find the best ones easily beat the higher-paying ordinary savings accounts.