Which type of savings account is best for me?

Which type of savings account is best for me? Fixed-term, easy access, ISAs and regular savers - they can all have a place in your plan - Bookmark - CommentsGo to comments It’s a great time to earn a good return on savings – but trying to find the right place to keep your cash can feel like a minefield. There are various options available to savers, each of which can be useful as part of a wider savings plan, and you can mix and match accounts to suit. Consumers should look at the different types of account and consider whether they’re suitable - taking into consideration how much they are able to save and when they’ll need access to it. “The wider savings market is offering more opportunities for competitive returns, with 1,412 accounts paying above the Bank of England’s base rate, the highest number seen since July 2012,” Caitlyn Eastell of Moneyfacts said. “Fixed-rate savers may be able to lock in some of the strongest returns seen in years, with average long-term [accounts] hitting their highest levels since January 2024. Not only this, but longer-term rates have consistently remained higher than their one-year equals. “This could be a valuable opportunity for savers who can afford to leave their money untouched to secure a competitive return and protect themselves against any future falls in savings rates.” So which account type is right for you and how much can you earn in interest across each of them? How much can I earn in an easy access savings account? For the purposes of comparison, we’ll use sums of £3,000 and £20,000 in each case to see the interest earned. For an easy access account with a top-paying 5 per cent rate, if you put the full £3,000 sum in on day one and left it there all year untouched, you’d earn £150 in interest - very straightforward. For £20,000, the interest payment would be £1,000. Get a free fractional share worth up to £100. Capital at risk. Terms and conditions apply. ADVERTISEMENT Get a free fractional share worth up to £100. Capital at risk. Terms and conditions apply. ADVERTISEMENT Except, the purpose of having an easy access account is exactly that: get to the money when needed, withdraw some to pay expenses and keep adding to it across the year if possible - meaning it’s very unlikely the full sum sits untouched and unchanging. That accessibility is of course both a positive and a negative: you could be tempted to spend money on something you don’t really need, but it highlights the importance of flexibility when it comes to managing your money. However, it’s important to also note that some easy access accounts limit how many withdrawals you can make across a single year, while others may have a bonus interest rate which expires after six or 12 months. One additional factor is that most accounts of this type are variable - the interest rate can change with only a few weeks’ notice. So if the Bank of England (BoE) lowers the base rate, for example, the amount you earn could change. How much can I earn in a cash ISA? A cash ISA is very similar to a normal savings account, except there’s no tax to pay on the interest. Basic-rate taxpayers get a £1,000 allowance of tax-free interest earnings, while that’s reduced to £500 for a higher-rate payer and no allowance for those who pay the additional rate of tax. The best cash ISA rate in mid-August is 4.61 per cent with Sidekick, meaning £3,000 would earn £138.30 in interest over a year and £20,000 of savings would earn £922 in interest. Those are lower amounts of interest than the easy access account above - but there are two factors to consider. First, is the tax position. A higher-rate taxpayer with £20,000 in savings would pay 40 per cent tax on the interest earned over their allowance; from the earlier example of £1,000 in interest earned, that’s 40 per cent of £500 meaning a £200 tax bill would be due. As such, it would “only” leave them with £800 in interest kept, which means it would be more tax-efficient for them (keeping £122 more) to take the lower interest rate in an ISA, which is protected from tax. Secondly, each person has a £20,000 annual ISA and, as of April 2027, each person’s ISA allowance can only be made up of a maximum of £12,000 annually going into a cash ISA, with the rest reserved for investing. That change only applies to under-65s. How much can I earn in a fixed-term savings account? Fixed-term accounts, also called fixed-term bonds, are very predictable as the interest rate does not change for the entire term - but the big trade-off to that certainty is that you lock your money away for a time, usually such as one, two or three years. For example, you can right now lock in a two-year term on 4.85 per cent annually from GB Bank, which would guarantee you £145.50 each year in interest from £3,000 or £970 a year from £20,000 in savings - even if the BoE reduces the base rate several times across that period of time. Of course, if the BoE raises the rate twice in that time, you’d miss out on that higher rate, too. The other considerations are that you cannot access the money until the term is up, as well as when the tax is paid. If the interest is paid in a lump sum at the end of two years when the account matures, even a basic rate worker would get a £188 tax bill to pay for earning interest above the tax-free allowance. Working out how much you’ll get, and when, is a big part of the mix when it comes to deciding if locking some of your cash away in a fixed-term account is right for you - and ISA versions are available too. How much can I earn in a regular saver account? A regular saver account is sometimes overlooked because there are purposely smaller amounts involved - you cannot usually open one with £3,000 or bigger amounts. Only 15 per cent of adults had one in 2024. However, they are extremely useful for helping people get into the habit of saving, as well as for planning an expense you know is coming - most of them last for 12 months, then pay out the interest and convert to a normal easy-access savings account. They work by offering a higher headline rate of interest - you can get 8 per cent in at least two places right now - but allowing smaller amounts to be saved each month, often by automating the process. While you can’t save £3,000 in one go, you can hit that total across a year by paying in £250 a month - making it extremely helpful for those who don’t have a big deposit to start with. It’s important to understand you don’t get 8 per cent on the full amount of cash though, as only the first month’s £250 is in the account for the full year. So if you opened the account in September and made that first payment, the next one in October would only be earning interest for 11 months, while the payment in November would earn interest for 10 months, and so on. Even so, the total interest earned would still be £120-130 depending on the exact dates you pay in and other factors like how often the bank calculates your interest - making it comparable with the interest from our cash ISA example, which you’d need to have the whole £3,000 available to you on day one to earn. That highlights the power of repetition and habit-building when it comes to saving money - as well as the realisation that after a year, the saver would have built up a pot of thousands of pounds, despite having started with zero, significantly boosting their financial resilience in the process. Join our commenting forum Join thought-provoking conversations, follow other Independent readers and see their replies Comments