Overview of Savings Accounts

Savings accounts are those accounts where larger deposits can be left and interest generated. In this respect, they may not seem that dissimilar from checking or current accounts. However, savings account usually have higher interest rates than these accounts which usually return less than 1% of interest, although may be easier access. As such, savings accounts are higher yield accounts suitable for shorter or longer term saving plans.

Overall, such savings accounts can come in various shapes and sizes. Although in the UK there are really two types of saving accounts. The first are just saving accounts which generate interest and can be taxed. The second type of savings account are Cash Isa accounts which are tax-free saving accounts. As such, they are not taxed and have maximum annual deposits of £3,600 which may be less than some saving accounts.

However, a further distinction between the various saving accounts can also lie in the type of interest rates they have. Saving accounts can either have fixed or variable rates of interest. Variable interest is interest rates that can change, and either go up or down. In contrast, fixed rate savings account interest remains unchanged and can be higher than average variable interest rates.

As such, fixed rate savings accounts can be more longer term savings account. In this respect they may not have such easy access and require that a deposit be left for a particular period. Any withdrawals before this period could have an impact on the savings account returns.

Regardless of the type of savings account opened interest is the percentage return you can expect annually. They are stated as an AER, which stands for annual equivalent rate, in other words an annual rate of interest. With this, all saving accounts can be compared equally.

 Interest rates will typically vary from account to account. However, unless they are limited to a one-year investment period all will have the advantages of compound interest. Compound interest is the interest generated on the interest. Let us say for example that $100 interest is returned in the first year. Without any additional deposits a 3% interest rate will return $103 over the next period. As such, no additional deposits need be made to increase the interest returned.

Opening a savings account may usually also require a current account with a particular bank. Usually, but not necessarily always and some may not require this. Today, more on-line savings accounts are also emerging as an alternative.

So, there are a few types of saving accounts with fixed and variable rate interest saving account or Cash Isa. They can have variable terms and conditions, with some having more limited access than others. Regardless of this, the AER can always be compared between saving accounts and the interest will always compound.