Saving money is hard enough without having to try to figure out which is the best savings account. With so many different types of savings accounts out there, it can feel like you’re blindfolded in a maze!
No more stumbling around into dead-ends. In this article, we’re going to give you the path to getting the most interest for your money.
How to find the best savings account
It’s really easy to find the best savings accounts. You just follow the savings pyramid:
How the savings pyramid works
You start from the bottom. You want to put the maximum amount of your savings into this layer on the pyramid. Then, if you still have more savings, you move up to the next layer and fill that up. And so on.
Think of it as adding layers to a cake. You put the biggest layer on the bottom and build up from there.
Realistically, most of us won’t have enough savings to fill up more than a couple of layers to start (or ever!). So don’t worry about where you get to on the pyramid. That’s not the goal. The aim is to maximise what you do have. And help you build up that savings pot sooner.
Layer 1: Help-to-buy ISA or Lifetime ISA (LISA)
Only for first-time buyers: if this is you, then you should look at putting your savings into a Help-to-buy ISA (HTB) or a Lifetime ISA (LISA) first. This is because the government gives you a 25% bonus on what you save (subject to limits). But we only recommend this if you’ll definitely be using the money to buy a house.
Be aware that there are limits on how much you can spend on a home (LISA: £450k compared to HTB: £250k – or £450k in London).
The LISA is more flexible than the Help-to-buy ISA. You can save more per tax year (£4,000, compared to just £2,400 in the HTB). Which means you get more of a bonus (both pay 25% on whatever you save, so it’s the difference between £1,000 bonus with the LISA and £600 with the HTB).
Plus you can pay in lump sums OR monthly amounts (with HTB, you have to pay in monthly).
Not sure which is best for you? Generally, we recommend the LISA, but check out our handy guide to Help-to-buy ISA vs Lifetime ISA.
Layer 2: High interest current account
Because all the banks want you to open a current account with them, they are fighting to offer you the best interest rates. Often these are much higher (3% – 5%) than the interest rates you’d get on a savings account.
Does it make sense? No. But it’s a good way to save, plus you have instant access to your cash. So it’s the best place for an emergency fund. Most of the current accounts will only apply the high interest rate to a fixed amount of money (say, £1,000). So consider opening multiple accounts to max out your interest.
Layer 3: Regular savings account
A regular savings account is one where you set it up to automatically pay in a set amount of money (usually monthly). The best way to use a regular savings account is to treat it like the overspill from your high-paying current account.
So you put the money into your high interest current account first, wait till you get the interest on it, then pay some of it across monthly to feed your regular savings account.
Layer 4: Cash ISA – Fixed rate
ISAs are savings account where you don’t get taxed on the interest. You can add up to £20,000 to an ISA in each tax year (which runs 6 April – 5 April).
You can stash a lot of cash in your ISA, which is good. What’s less good is the typical interest rates they pay. Which is why you’re usually better off putting the money into your regular savings account first, earning interest on that, then moving it across to your ISA each tax year.
A fixed rate ISA is one where you have to leave the money in for a fixed amount of time to get the interest rate. So use it for longer-term savings.
Layer 4: Cash ISA – Easy access
An easy access (or instant access) ISA has the same tax benefits as a fixed rate one (but usually lower interest rates). Plus, you can take out your money at any time. So if you know that you’ll need to withdraw your money earlier than the average fixed rate period, this might be a better option for you.