Compare high interest savings accounts

What is a high interest savings account?

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, in comparison, will offer a lower interest rate on your balance each month, but there usually won’t be account conditions to meet.

How does a high interest savings account work?

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.

How you access your savings

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 bank 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, or maybe even none at all, over a set period.

How you earn interest

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 – in practice, though, regular deposits are often a condition of having the account in the first place.

What conditions you need to meet

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.

Benefits of a high interest savings account

• A higher interest rate helps your savings grow faster.

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 money is safe.

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.

• It’s a good incentive to save.

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.

• There are no fees.

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).

Tips and traps of a high interest savings account

Here are some tips to help you choose the right high interest savings account for you, and some traps to avoid.

Tips

• Make sure you’re comfortable with the account conditions. If you can’t realistically meet the account conditions each month, you won’t earn the high interest rate so it defeats the purpose of opening that account.
• Switch accounts, constantly. To ensure you are always earning the highest rate, you could continually switch savings accounts after the introductory period ends – which is usually after one year or more.
• Compare accounts regularly. Unlike some other financial products, savings accounts are frequently changing their rates. This means you might have the highest rate one month, but not necessarily the next.
• Look at the variable base rate too. Don’t just look at the headline rate – the variable base rate is what you’ll earn if you can’t meet the account conditions one month, so make sure you check what this rate is too.

Traps

• Introductory offers are for limited times. If you open an account that offers a high introductory rate for six months, or a year, don’t forget that this rate will drop after the introductory period ends. Set yourself a reminder to compare accounts again after this period.
• The account conditions might be too difficult to meet. You can’t look at the interest rate without considering the account conditions. Some high interest savings accounts will require you to deposit £1,000 or more each month to earn the high rate, which may be difficult to meet.
• The linked current account might have fees. High interest savings accounts will sometimes require you to also open a current account with the same bank, and this account might come with fees and charges.

How do I apply for a high interest savings account?

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:

• Your personal details, such as your full name and contact information
• Documents to verify your identity and age, like your driving licence or passport
• Financial details, such as monthly incomings and outgoings

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.