Are you thinking about opening a savings account? If so, you probably know just how much choice there is out there, and it can feel overwhelming when you’re figuring out which type of account is right for you. That’s why we created these articles, to help you on your way. In this article, we’re diving into easy access savings accounts.
What is an easy access savings account?
An easy access savings account, also sometimes called an instant access savings account, is a straightforward account, designed specifically for saving. These types of accounts let you earn interest on your savings, with the flexibility that you can withdraw your money whenever you want, quickly and easily. This ease of access makes this type of account ideal for putting money away for an emergency fund, in case you need to access it quickly should an unexpected bill arise. It’s worth bearing in mind that not all easy savings accounts offer the same level of access. There could be a short wait to take your money out with some providers and you might not have completely unlimited access. Always double-check the details before opening an account.
What interest do they pay?
Most easy access accounts have variable interest rates. This means that the rate on your account can and will likely change over time. This could be driven by the Bank of England base rate, or your provider amending the levels of interest they’re offering to customers. The exact amount of interest you earn will depend on the type of easy access savings account you choose, your provider, and of course how much money you have in your account. Of course, the more money you have in your account, the more interest you’ll receive on your savings. It’s worth noting, that generally easy access savings accounts have better interest rates than current accounts, but lower rates than other types of savings accounts like fixed rate and notice savings accounts.
Why do people save?
Aside from having a nest egg for later life, saving for an expected life event, like buying a house, or setting aside an emergency fund in case the boiler breaks down, people save to earn interest. Most easy access accounts pay interest yearly, although you may be able to choose to have it paid monthly. This interest can then be useful for people who either want to use the interest to top up their income or build up their savings pot further, through the power of compounding.
What is compounding?
Compound interest, or compounding is the interest earned on both the original saving and the accumulated interest. In the context of saving, compounding is achieved by reinvesting interest earnings to increase your overall savings pot and enable further returns over time. For instance, if you save £1000 with a 6% annual return, the £60 earned in the first year is added to your savings pot, resulting in a larger pot of £1060. The subsequent interest is then calculated on this new amount, fostering a compounding effect. By continuously reinvesting interest, the savings grow exponentially. In a five-year scenario, the initial £1000 grows to £1338.23, with £338.23 attributed to compounded interest alone. This compounding gains momentum over time as more earnings are reinvested, illustrating the power of allowing savings to generate returns over time. Of course, this is just a worked example to show compounding in action. Real interest rates may change over time.
Advantages of easy access accounts
The process of setting up and managing easy access savings accounts is generally quite straightforward. With the added benefit of earning usually quite reasonable interest on your deposited funds, it offers a hassle-free way to grow your savings more than you likely would in a bog standard current account. You have the flexibility to make deposits at your convenience, allowing you to contribute to your savings over time, whenever you see fit. Additionally and probably most importantly, the account allows withdrawals without the requirement of advance notice, providing accessibility to your funds whenever you need them. What's more, there's no need for huge initial deposits, many providers allow savers to start with anything between £1-£1000, making it accessible to individuals with varying levels of savings.
Disadvantages of easy access accounts
While easy access to savings accounts presents certain advantages, it's essential to be aware of potential drawbacks. Higher interest rates may be obtainable through different types of savings accounts, like fixed rate or notice savings accounts, prompting the need for a personalised comparative assessment of available options. Furthermore, limitations on the frequency of cash withdrawals within a specific timeframe may apply, so be sure to check each provider’s terms carefully. Additionally, the variable nature of interest rates introduces the possibility of reductions of your interest on short notice, underscoring the importance of staying informed about potential fluctuations, particularly if you’re saving for interest income, or to maximise the effect of compound interest. Finally, it's worth being aware that some easy access savings accounts offer a temporary bonus rate to new customers. This crate is almost always short term and once the bonus period is over, you could find that the rate drops below rates offered by other providers.
How to choose the best provider
If you’re getting close to deciding on whether or not this type of savings account is for you, and you’ve had a look at some options on our easy access savings account comparison table, be sure to consider these factors before going ahead with a provider.
Interest rates - Rates differ among providers, so be sure to compare them against one another and verify whether the rate includes a temporary new customer bonus rate, which may decrease after a few months.
Access - Examine if there are any limitations on when and how you can access your savings. Certain accounts may impose restrictions on the frequency of withdrawals per month or year, and may even impose penalty charges if you go over your allowance.
Account Management - Consider how you want to manage the account, whether it's through an app, a web platform, or even in person, in a bank branch. Also bear in mind, how this relates to how you can get customer support if you have a question, or if something goes wrong.
Is now a good time to save this way?
Following years of historically low interest rates, there's a welcome shift as banks are now providing more attractive rates for savers, driven by the steady increase in the base rate by the Bank of England since early 2022, as a result of rising inflation rates. Although most savings products have higher rates, making it a comparatively better time to save than even a few years ago, it's crucial to consider potential shifts in interest rates. If there's a likelihood of the Bank of England lowering rates, opting for a fixed account might be a good idea to secure a consistent interest rate for a specified period. Easy access savings accounts however presently offer the highest rates since the 2008 financial crash, providing a flexible option despite potential rate fluctuations. Easy access savings accounts prove particularly valuable amid the ongoing cost of living crisis, offering instant access to funds that have grown due to higher interest rates. Given the limitations of many high-rate current accounts, easy access savings accounts emerge as a pragmatic alternative for savers.
Is it right for me?
It’s usually a pretty good idea to have some form of savings in place, and If you're keen to start saving while retaining the flexibility to access your funds for unexpected expenses, easy access accounts may offer a solid solution. However, if you have longer term savings goals in mind, don’t want the temptation of accessing the money at will, and are comfortable locking away your money, you might benefit from a higher interest rate provided by alternatives like a fixed-rate savings account. For those open to a bit more risk, a stocks and shares ISA might be worth researching, though bear in mind the potential fluctuations in the value of your investment, posing a risk of receiving less money than initially invested, which is not the case with savings. Weighing these options can help align your savings strategy with your financial goals, and decide if easy access savings accounts are for you.