If you want to build up some savings or already have some then it is a good idea to think about where you are going to put the money. There are lots of different options and it can be rather confusing. It is therefore worth getting a grasp of the basics so that you can make a better decision as to where you might want to put your money and hopefully will be in a position to research it further.
Instant Access Account
An instant access account will allow you to be able to get hold of your money right away. There are different types of instant access account but it can be good to look at the different types if you want an account like this. You need to think about how quickly you will need to get hold of your money and if it is likely that you will need some for emergencies then this is the type of account you want. Some people will choose to keep some money in an account like this and then some in an account that pays higher interest. An instant access account will often have lower interest than accounts where you tie your money up.
This sort of account will usually offer a better rate of interest than a current account but you will need to give notice when you want to tale money out. This could be 30 days or a few months, it will vary a lot depending on the specific account that you choose. You will therefore need to think about whether you think that this will be the right sort of account for you. If you are prepared to wait for the money that you need, then it could very well be suitable for you.
Fixed Term Account
These accounts tie money up for a certain amount of time, normally between one and five years depending on the account. They are often bonds and you may also need a certain amount of money to put in or be limited in how much you can put in. They tend to pay a higher rate of interest but they will obviously put your money away so you cannot get hold of it. Therefore, it is really only for money that you know that you will not need. It is worth noting though that for some bonds you are able to get your money out early but there is a penalty so you will not get all of the interest that you have earned.
An income account will pay you a monthly income – in other words the interest you earn will be paid to you into your current account. This has disadvantages in that the interest is not added on to the account and so you do not get compounded interest (interest on your interest) which can help the value of the account grow more quickly, but it an provide you will an income which can be particularly useful if you want to boost your income or if you are in retirement and need an income.
An ISA is a tax free account. If you are a lower level tax payer you can earn up to £1,000 a year in interest without paying tax and if you are a higher rate tax payer that is £500 and if you are the highest tier of tax payer then you pay tax on everything you earn. So, some people will benefit more from a tax free account than others. Often the interest rate is a bit lower than other types of accounts but you have to calculate whether it will be better to use an ISA if you are getting taxed on your interest form the other account.