For those new to banking, the vast array of financial products on offer can be daunting. Here’s a breakdown of the main differences between current accounts and savings accounts to help you work out where the best place for your money might be.
Current accounts
In the UK current accounts, also known as bank accounts, are the most common type of account for doing day-to-day banking. Most would have one that they use for paying and receiving money. These payments may be to or from other individuals or organisations or even the individual’s other accounts like their mortgage or savings.
These are the main features of a current account:
- A debit card: to withdraw money from the account in a branch or at a cash machine (ATM) and to pay for goods at the point of sale and online;
- A cheque book: to make payments to another individual or organisation without having to have the physical money present;
- Standing orders: to make regular payments into another person’s account;
- Direct debits: to make automatic bill payments from your account;
- Internet and telephone banking: to access and manage your account online or over the phone;
- Overdraft facility: to allow you to go overdrawn up to a certain amount, provided your bank has agreed to this in advance.
Most banks offer a standard bank account with the features above, as well as other ‘premium’ accounts with extra features and benefits, so it’s worth shopping around to find one that’s right for you.
For some customers, even the best current accounts are no good if the bank is not easy to engage with. Companies such as first direct are contactable 24 hours a day, 365 days a year and the phone is answered by a real person – not a machine – which can greatly enhance the experience of using a current account.
Whatever you choose, you need to make sure your bank account suits your lifestyle and monetary habits. Current accounts offer a range of different facilities, some of which incur charges, so to get the best value make sure you only go for the features you think you’ll use.
Savings accounts
If you have spare cash in your current account then it’s a good idea put some of it into a savings account. A savings account or deposit account keeps your money separate from your current account and pays you a rate of interest on the amount held.
There are many different types of savings account on offer: the main differences between them are how quickly you can access your money, the amount you need to deposit to open the account and what rate of interest they pay.
These are the main types of savings accounts to choose from:
1) Tax-free savings:
Interest earned in normal savings accounts is subject to UK Income tax. Whereas interest earned in cash ISAs (or Individual Savings Accounts) is tax-free on deposits up to £5,640 each year. If you’re a UK taxpayer, it makes sense to open an ISA first over any other type of savings account.
2) Regular savings:
With these accounts, you arrange to deposit a set amount every month for a fixed period and at the end of that period (usually a year) you receive a lump sum in your current or easy access account. If you’re saving for short term goal, like a wedding or a holiday, a regular savings account could be ideal as it gets you in to the habit of saving frequently and you’re unlikely to be able to get at your savings to spend them before the end of the term without a penalty.
3) Easy access savings:
These are savings accounts that allow you to withdraw your money more freely than regular savings accounts, usually with cash cards or online banking. They are a good place to keep ‘rainy day’ funds as you can quickly access to your savings at short notice.
4) Fixed term savings:
These accounts offer a fixed interest rate on your cash for a set period of time, usually 2 to 5 years. Interest rates can be higher on these products but this means that access to your money is restricted during this period. There is normally a penalty to pay if you need to access your money during the term. Also, a large deposit can often be required to open this type of account, which rules them out for beginner savers and those without large savings balances.
Choosing the right savings account is really a case of deciding how quickly you think you might need to get access to your money and how much you want to deposit. Once you’ve decided that, it’s just a matter of shopping around for the best rates.
For more on different types of current and savings accounts, visit direct.gov.uk
