How Savings Accounts Work
Opening a savings account is one of the best ways to set aside money and watch it grow through interest securely.
Banks and building societies offer savings accounts in the UK to give people a place to store cash and earn a modest return.
This guide will explain savings accounts, who offers them, how interest works, and tips for getting the most out of a basic savings account in the UK.
What is a Savings Account?
A savings account is a deposit held at a bank or building society. It allows you to earn interest on your deposit money while keeping it safely accessible.
Savings accounts differ from current accounts (used for day-to-day spending) and ISAs (tax-free savings plans). They do not offer all the features of a chequing account but provide the critical benefit of earning interest.
The primary purpose of a standard savings account is to store cash and watch your money grow. Savings accounts are ideal for holding emergency funds, saving for a short-term goal, or stashing away money you don't need immediate access.
Who Offers Savings Accounts in the UK?
Most major banks and building societies in the UK offer savings accounts. This includes high street banks like:
As well as building societies such as:
- Yorkshire Building Society
- Coventry Building Society
- Skipton Building Society
You can quickly and conveniently open a savings account at your existing high street bank. However, smaller providers sometimes offer better interest rates. An online bank account may yield higher returns than a traditional brick-and-mortar provider.
Some current accounts also pay interest, especially if you maintain a minimum balance. But the rate is usually lower than a dedicated savings account from the same provider.
How Do Savings Accounts Earn Interest?
The main benefit of keeping money in a savings account is that it grows over time by earning interest. This provides a return on your deposits.
Interest accrues based on your savings account balance, interest rate, and compounding frequency. For example, with a 2% interest rate compounded annually on a £10,000 deposit, you would earn £200 in interest after the first year.
Interest is calculated daily and credited to your account monthly, quarterly, annually, or at another regular interval. Compounding frequency impacts how quickly your money grows. More frequent compounding (e.g. daily or monthly) is better than less frequent compounding (just annually).
Many savings accounts in the UK now pay interest monthly. This allows you to take advantage of compound growth more often.
The actual interest rate you earn varies by provider and also the market and economy at the time.
Choosing a UK Savings Account Provider
When opening a savings account in the UK, you'll want to consider factors like:
- Interest rate - The higher the rate, the more interest you'll earn, allowing your savings to grow faster. Check if it's an introductory rate that will drop later.
- Fees - Some accounts charge monthly maintenance or overdraft fees that could eat into your interest earned. Avoid accounts with high fees.
- Online banking - Many providers allow you to manage savings digitally via mobile and web interfaces. This offers convenience.
- Accessibility - Consider how easily you can deposit and withdraw funds from the account. Some have limits on transfers.
- Customer service - You want an institution with helpful customer support in case any issues arise. Read reviews online.
- Financial protection - Your deposits up to £85,000 are protected by the FSCS at regulated UK banks and building societies.
Focus first on finding an account with a competitive interest rate and low fees. Then ensure the account provides sufficient accessibility and support for your needs.
Opening a Savings Account in the UK
Opening a savings account is usually quick and straightforward. You can open most accounts online or visit a local branch.
Here is the basic process to open an account:
- Choose a provider - Research interest rates, fees, and features, then select an account that fits your requirements.
- Complete application - Apply online or in person. You must provide personal details like your name, address, contact information, and date of birth.
- Verify identity - The bank or building society must confirm your identity. You must show ID such as a passport or driver's licence.
- Make initial deposit - There is usually a minimum deposit amount to open the account, often between £1-£500. Fund the account to activate it.
- Agree to terms - Accept the bank's terms and conditions for the savings account to finish opening it.
Your new account will be opened once your application is approved and the initial deposit made. The provider will send you confirmation by post or email with account details to access your funds.
Paying Money into a Savings Account
After opening your savings account, you can continue paying in whenever you have available funds. Common ways to add money include:
- Electronic bank transfer - Set up a standing order from your current account or make direct transfers online or in mobile banking.
- Over-the-counter deposit - Take cash or a cheque into a branch to deposit into your savings account.
- Paying in the book - Write deposit slips for cheques you want to pay in and add to your account.
- Automated deposits - Some accounts let you schedule automatic regular deposits from a linked account.
- Cash machine - Use an ATM card for your savings account to pay in cash at cash machines that accept deposits.
You can pay money as frequently or infrequently as you want, depending on the flexibility of your account. Paying monthly is a great way to steadily build your savings.
Withdrawing Money from a Savings Account
Unlike a current account, you cannot make payments directly from a basic savings account. But withdrawing money is easy when you need access to funds.
- Electronic transfer - Use online or mobile banking to transfer money from your savings to your current account.
- Cheque - Request a cheque from your provider to cash or deposit elsewhere.
- Standing order - Set up automatic regular transfers from your savings to your current account.
Be aware withdrawals may be limited to a certain number per month. Excess transactions can incur fees. It is meant for infrequent access rather than as your primary spending account.
Tips for Getting the Most from Your Savings Account
Follow these tips to maximise your savings account benefits:
- Maintain a minimum balance is required to earn interest
- Check for promotional interest rates when opening an account
- Use regular standing orders or direct debits to make automatic deposits
- Compound interest works best with more significant balances, so save as much as you can
- Look for accounts with monthly interest compounding to grow your money faster
- Avoid withdrawals unless necessary so interest can compound
- Review your interest rate annually. Switch accounts if you find a higher rate
- Take advantage of loyalty rates or interest bonuses offered to existing customers
Are Savings Accounts Worth It?
While interest rates are lower than they were 20 years ago, savings accounts remain a simple way to store cash and earn passive income. The safety and stability they provide make savings accounts worth using.
Your money grows rather than sitting in a current account. Opening a savings account is quick and easy, with your funds protected. Setting aside even small sums can add up over time, thanks to compound interest.
Savings accounts may not make you rich, but they offer a modestly risk-free path to grow your money. The interest provides a nice bonus that is well worth having for peace of mind and financial security. Just be sure to shop around for the highest rate.
Savings Account FAQs
How does a savings account give you money?
A savings account pays interest on the balance, allowing your money to grow over time.
Is a savings account worth it?
Yes, savings accounts offer a safe place to earn interest and grow your money modestly, despite today's lower rates compared to 20 years ago.
Do you get money from a savings account?
You earn interest on the balance paid into your account, allowing you to grow your savings.
What are the pros and cons of a savings account?
Pros are earning interest, fund protection, and account stability. Cons are low returns compared to the potential with investing.
Is money safer in a savings account?
Yes, your money is safe in a savings account as balances are protected up to £85,000 by the FSCS.
How much money should you keep in savings?
Aim to have 3-6 months' worth of living expenses in an easily accessible savings account for emergencies.
Are there any downsides to a savings account?
Low-interest rates can mean modest growth, and you may be limited in withdrawals per month.