Rising interest rates might be bad news for borrowers, but they are great news for savers. So if you’re looking for a more competitive place to save your money, why not consider a high interest savings account? Here, we explain how they work and who they could suit.
The Financial Services Compensation Scheme (FSCS) guarantees that it will step in to compensate the first £85,000 (£170,000 for a joint account) you have saved with a UK-authorised bank, building society or credit union in the event that the business goes bust.
As the name suggests, a high interest savings account is basically a savings account that pays a high interest rate. Because it offers a higher interest rate than a typical savings account, there are usually a few conditions to meet to earn this rate. For example, you might be required to meet a minimum monthly deposit condition, or limit your withdrawals from the account. A regular savings account, by comparison, will offer a lower interest rate on your balance each month, but there won’t usually be account conditions to meet.
Here’s how you access your money, how interest is applied and the conditions you might need to meet with a high interest savings account.
People often link a high interest savings account to their everyday bank account, usually with the same bank. This allows you to easily move money back and forth from your savings account to your everyday bank account when needed. This is handy, as high interest savings accounts don’t come with a debit card to access your money (but current accounts do). However, remember to check the conditions of the account first. For example, you might only be allowed to make a limited number of withdrawals, if any at all, over a set period.
High interest savings accounts will offer a bonus interest rate on top of the base interest rate each month that you meet the account conditions. This gives you the chance to earn extra interest each month. A standard savings account, in comparison, will usually just offer the standard base interest rate only with no option to earn extra interest.
The money in your high interest savings account benefits from compound interest that is calculated daily and paid monthly. Compound interest allows you to earn interest on your interest, helping your money grow quicker.
For example, let’s say your balance was £10,000 and you earned £100 in interest during the month. The following month, interest would be calculated on your full balance of £10,100 (that’s your original balance plus the interest earned last month) so you’d earn even more interest the second month. So in theory, you don’t even need to deposit money regularly for your savings balance to grow. However, in practice regular deposits are often a condition of having the account in the first place.
As we said earlier, in exchange for a high interest rate on your savings there are usually a few account conditions you need to meet. This varies from bank to bank, but it often requires you to deposit a set amount of money each month and open an everyday bank account with the same bank. Some high interest savings accounts also require you to make a certain number of purchases from your linked everyday bank account each month, too.
Compared to an everyday current account, which usually pays no interest, and a standard savings account, which won’t pay much interest, a high interest savings account can help you grow your savings faster.
Your savings are protected by the Financial Conduct Authority under the Financial Services Compensation Scheme (FSCS). Most banks and financial institutions are included in the scheme, which means eligible deposits are insured up to £85,000 per person, per institution.
Because you often need to deposit money regularly in order to earn the high interest rate, these accounts are a great incentive to save money. They can also be a good motivation to keep your money in the account earning interest, rather than spending it on day-to-day items and impulse purchases.
High interest savings accounts don’t charge any account keeping fees and there are no fees to add money into, or move money out of, the account. But remember that you will only be taxed if you earn more than your personal savings allowance in interest (£1,000 a year for basic rate taxpayers).
Here are some tips to help you choose the right high interest savings account for you, and some traps to avoid.
A lot of high interest savings accounts offer special bonus introductory rates for a fixed amount of time, such as the first six months to a year only. This is a way for the bank to entice you to open an account.
So you could open an account to get the high rate, then after the introductory period ends you can move your savings into another account with a different bank to take advantage of its high introductory rate. Rinse and repeat to ensure you’re always getting a high rate. Just remember, these offers are for new customers only so you can only open each account and get the high rate once.
You can open a high interest savings account online in a matter of minutes. It’s free and easy to do, and requires little effort or paperwork. Once you’ve clicked through to the bank’s secure application page, you will typically need to provide:
Once you’ve finished the application form and the bank has verified your identity, your account will be opened and you’re able to start transferring money into it and earning interest.
| Rates up to | 7.49% AER |
|---|---|
| Number of accounts | 1,536 |
| Number of brands | 131 |
| Minimum investment | £0 |
| Maximum investment | £10,000,000 |
| Opening options | Website, mobile app, branch, telephone, post |
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