Best High-Interest Savings Account – Definitive Guide

How to choose a high-interest savings account

No matter what your financial situation is – whether you are rich, or simply getting by month to month, it is vital to be able to access an emergency fund. The best place to put those emergency funds is in high-interest savings accounts.

Normally, a saver would seek out high-yield savings accounts to either put their emergency, rainy day money or to save for the future. These accounts will pay out higher than average interest rates, which means that as a saver, you can reach your targets even quicker.

Currently, on average, a savings account will pay around 0.06% per year. However, most of the UK’s biggest banks offer even less.

You will often find that online banks are more generous than the more traditional banks – and these can often offer rates up to seven times more generous than the current national average.

A high-rate savings account

Basically, a high-rate savings account will pay its customers a more generous higher annual equivalent rate (AER) than a traditional mainstream savings account. This means that savers can get more value from their money but also enjoy the practicality and security of having funds in an insured account.

There are some financial institutions that offer special introductory rates on their high-interest rate savings accounts, but this will only be valid for a set period of time. However, because current interest rates are so low, these are now very difficult to find. As such, the majority of higher-rate interest accounts offer a variable rate – which can increase and decrease at any time.

How a high-interest savings account works

Currently, the national average savings account interest rate is around the 0.06% mark. However, this is the average – but as it stands, the most well-known brick and mortar accounts offer even less than this. A higher-interest savings account helps you to earn a higher yield.

From the moment that you start putting money into your high-interest rate savings account, the interest starts to grow. This interest, which would normally be credited either monthly or quarterly, also starts to earn interest. This is how compound interest works – and that’s how your money can really start to grow.

A high-interest rate savings account usually offers variable rates – which means they can both increase or decrease… however, given the recent low rates, it has been steadily decreasing since mid-2019.

Terms you need to know

• AER: The annual equivalent rate – also known as the annual percentage yield (APY), is the actual rate of return that you would end up earning on your savings account each year. This factors in not just the interest rate, but also the compounding interest and generally, this is the best way to compare savings accounts on a more accurate basis.
• Compound Interest: The easiest way to describe this is simply as the interest that you earn on your interest. As such, instead of simply earning interest on the money you have deposited yourself, you will earn interest on that money – and interest on any interest that you have already made on that money. This means that your money will start growing even quicker.
• Maintenance Fee/ Service Charge: This is the fee that is charged by the bank for looking after your account, which is usually charged if your balance drops below a certain figure.

What to consider before you choose a high AER account

Before you start searching for the best higher interest AER account for you, then there are some very important things you need to consider first. Also, we would thoroughly recommend that you read reviews of the banks and products first before committing your money.

Annual Equivalent Rate (AER)

One of the main things that you need to look at when choosing your account is the Annual Equivalent Rate – the AER.

It is the AER that takes into account the effect of compound interest… which is the interest that you earn on your first deposit as well as the interest that you earn on top of additional interest earnings. Generally, the higher the AER, the better. However, you do need to weigh up the AER against what you need to do to earn it.

We would recommend using a compound interest calculator so that you can calculate any potential earnings you might make in your savings account.

Minimum deposit needed to open the account

The minimum amount you need to open an account will vary from bank to bank. Some may not need you to have anything to open an account, whereas more elite products might need you to open the account with a minimum £10,000 deposit or more.

So, you need to decide how much money you have available to realistically invest when comparing the products. If you have a specific savings goal in mind, then you need to think about how much you can – and are willing to save over a set timeframe.

It is worth being aware that just because an account requires a higher minimum deposit, it might not necessarily offer the best yield. As such, it is worth checking the minimum deposit requirements for all banks and institutions you are thinking about before you open your new account. An online bank, for example, generally requires no minimum deposit to open the account – and no minimum balance. Some also don’t charge customers maintenance fees.

Minimum balance to avoid fees

Of course – some not only require a customer to deposit a minimum amount to open the account, but they also have a minimum balance needed for them to earn the advertised AER – and/or avoid any possible fees.

The important things to consider when you weigh up the minimum balance requirements of a high-interest account is whether or not you will need to have regular access to the money – or how long you can leave it without touching it – and whether, realistically, you can maintain that balance to earn the advertised AER.

Interest rate changes

The Bank of England reassesses the base rate every three months – and any change is generally passed on to all other financial institutions – and will adjust interest rates. Unlike fixed-rate accounts, many of the higher AER rate accounts are variable, which means they are subject to change with very little warning.

A bank or financial institution might choose to raise or lower their savings account AER for all sorts of reasons. It could raise it to attract new customers as part of a promotion, or it may lower rates in response to the current economic climate.

Because most high savings accounts are usually variable, you need to take into consideration how often the bank offers an overly generous rate at first that could fluctuate – and decide how this might affect your potential earnings after one year.

Available withdrawal options

Each different type of savings account has its own rules and regulations as to how much and how many withdrawals you can make – and when. They also have different withdrawal options available, so this is certainly something you need to factor in based on your needs. Options generally available are online transfers to alternative accounts, phone transfers, automatic transfers – and debit cards and cheques. If you need instant access to money, then you need an account that allows instant access – with plenty of withdrawal options. You need to factor in that a higher AER account may require you to leave your funds alone for a longer period of time.

Are high AER accounts secure?

The reason that many people opt for a high AER bank account is that, like any traditional savings account, they are safe and secure. A high AER savings account offers customers a secure place to keep the money that they are saving for emergencies, costly expenses and their future savings goals – while earning decent interest.

We would, however, always recommend that you check your accounts on a regular basis for any unauthorised withdrawals, or transactions that you don’t recognise. If you find any, make sure you notify your bank with immediate effect.

Why many online accounts offer higher AER

Normally, the best available high-interest savings accounts are those you find at online banks. An online bank will usually offer the most competitive AER on their savings accounts. One reason that they can afford to do this is that they don’t have as many overheads and expenses, as they don’t operate brick-and-mortar branches.

Also, these online banks need to compete with high street banks for your attention and the best way to do this is by offering a higher AER. Moreover, an online bank will also not usually charge a service fee for the account. They also usually don’t ask for opening deposit requirements or minimum balances either.

A high-interest savings account – is it right for you?

Unfortunately for savers, because of where we are right now financially, low-interest rates are the most available. However, some interest, even a lower amount, is better than none at all… and rates might be on the rise soon. As such, moving any money you have that is lying in a non-interest account to a higher interest account is definitely a smarter move. By earning a good AER, your bank balance will grow even more over time – as long as you are prepared to keep your money in the account.

Opening a high-interest account

Whatever reason you have for opening a high-interest saving account – whether it’s saving for the future or having money to spend on a rainy day, opening an account is very easy. Just follow these simple steps:

• Look through the markets carefully and shop around. You will find numerous high-interest accounts from all different institutions – online banks and traditional banks. Generally, it is the online banks that offer customers a higher interest rate because they have fewer overheads than the more traditional banks that have to maintain branches. They can then pass these savings on to their customers – in the form of higher rates. As well as AER, compare fees and services to make sure it suits your requirements exactly.

• Fill in your application form. As soon as you have chosen your preferred high-interest account, you will need to fill out an application form – either online or in-person, at a branch. You will need to provide personal information, such as name, address, NI number, date of birth etc. You will also be required to submit documentation as evidence.

• Put money into your account. When the bank has approved the application, you will then need to put money into your account. You can do this by linking your regular bank account to your new savings account and transferring the money directly. Some banks may also allow you to deposit into your account with cash funds, via a cheque, via wire transfer and some even also allow mobile deposits. Make sure you deposit enough money to cover the minimum deposit requirement set by the bank or you may find yourself facing a lower than expected interest rate or maintenance fees until this requirement has been met.

If you are unable to open a high-interest account

A bank isn’t obliged to open your account just because you have applied. In some instances, it may be that your application is declined. If, for some reason, this does happen then we would recommend you access a free credit check to see what your score is and read through the report so that you can start understanding what has happened.

These free credit checks are available freely and are perfect to help you keep track of your banking and credit history. Any negative history will be visible on the report.

Why use a high-interest account?

There are many reasons you might choose to open a higher interest savings account:

Save for an expensive purchase

Mortgages, for example, aren’t given away at the drop of a hat, to anyone who asks. Most mortgage lenders will ask you to put down a deposit of anywhere between 5% to 20% of the cost of the house before lending you any money at all.

So, if you are interested in buying a house for £300,000 then, even if you are only required to put down a 5% deposit, you will need to have saved £15,000. If you are asked for a 20% deposit, then it could be as much as £60,000 needed.

Saving that much money will probably take quite some time – but opening a high-interest account should see you reach the goal a little more quickly. As such, if you can afford to put a set amount of money away every month, without needing access, then finding a higher interest rate savings account will certainly be handy.

Also, if you are looking to buy a decent car, then this will also probably need you to make a down payment if you buy it on finance. It is better to save up and pay for your car outright if possible, which is more achievable if you have a high-interest account. This will save finance fees and added interest.

Planning for a holiday or big event

If you are looking to plan an expensive holiday – or even planning to get married, then this can be hugely expensive now. In fact, according to recent stats, the average cost of a UK wedding these days is over £31,000.

A high-interest savings account is the perfect way to start saving towards the big day because it is safe, secure and accessible – and also insured.

If you made an initial deposit of £4,000 – in two years you would need to save about £1,120 each month in a high-interest rate (one that pays around 0.6% AER) to get to around £31,000 to spend on your wedding (and honeymoon).

Weddings aside, even an annual family holiday can be expensive now. As such, a high-interest savings account can also prove useful here. You can set your holiday budget – including travel, accommodation, food and expenses etc and then work out how much you need to save each month to reach your target.

Saving for the future

There are many reasons to save for the future – whether it’s for retirement or your children’s university funds – or helping them make a deposit on a house.

University fees are expensive – as is the cost of living whilst there. Although higher education grants are helpful, these costs can grow – and keeping debts as low as possible is important. Choosing to open a savings account to help is a very decent alternative to putting it all on a grant.

Other reasons to open a high-interest savings account

There are numerous reasons to open a high-interest savings rate – aside from emergency money and holidays etc. It is always good to be prepared for any eventualities. Having a pot of money sitting there available for you, earning interest along the way can be used to cover any unexpected expenses – or even simply to have an even happier retirement at the end of your working life.

The pros and cons of high-interest accounts

Benefits

• Here are the benefits of opening a high-interest rate account:
• Firstly, they usually pay a much higher AER than your more traditional savings accounts.
• With an AER account, the interest is compounded daily. This means that you start earning interest on your interest.
• Lots of high AER savings accounts offer various digital tools that help you to manage your savings via a tablet or mobile phone.
• Most high AER accounts are easy to access, so you can get to your money if you need to.

Disadvantages

• High AER accounts generally have a variable interest rate, which means that it may fall at any time.
• There are some high-interest rates accounts that restrict your withdrawals or don’t allow you to access your funds without imposing penalties.
• You can’t always write cheques or have debit cards for a high AER account.

Paying tax on a high-interest account

The only way that you can avoid paying tax on your savings in the UK is if you invest in an ISA – and this allows you a £20,000 tax-free allowance. As such, any interest you earn on any account that isn’t within this allowance is taxable. Therefore, you need to take this into account if your savings and interest rates are particularly large.

Alternatives to high-interest accounts

ISAs

A high-interest savings account is available to most – offering good interest rates. However, a viable alternative is an ISA. There are several types of ISAs available. Cash ISAs are a similar alternative as they can offer reasonably generous interest rates and you can save up to £20,000 every tax year tax-free. However, you can only have one of each type of ISA per year.

Then there is a stocks and shares ISA. This can offer even better returns but there is more risk attached. Because there are stocks and shares involved, you can gain money – or lose money based on the market. So, you need to be prepared to risk your funds.

Traditional savings account

A traditional savings account is very similar to a high-interest savings account. Most are accessible online and offer various ways to access your money. However, there are often more stipulations attached to the higher interest account – and your money may not be as easily accessible. Moreover, there may be fees and penalties attached to a higher interest rate account.

On the other hand, a traditional savings account won’t offer as much in terms of interest – so this is more of an option for anyone preferring quick access, more flexibility and without the need to build up funds as quickly.

How accessible are high-interest accounts?

When you are looking for where to open your high-interest account, you need to think about whether or not you feel it is important to be able to visit the bank in person. Most of the best high-interest accounts are found at online banks – which means you won’t have any access to a branch. However, you can still manage your account online through the bank’s website or by using its mobile app.

If you are someone that prefers the more personal touch, then it might be in your best interests to open a high-interest savings account at your local brick-and-mortar bank. Although they may only offer limited business hours and may not have services available all the time, this can be better for some than no contact at all.

It’s always worth looking to see which banks out there offer both high rates of interest and local branches so that you can get the best of both worlds.

Why interest rates have dropped recently

Since 2019, interest rates have dropped down, based on the Bank of England’s drop in base rate. This has meant that savers are receiving lower interest rates than ever – even those investing in a higher rate savings account. Despite the fact that the Bank of England moved up the base rate in December 2021, this hasn’t yet been reflected in interest rates, so currently, they are still stuck at an all-time low.

Although it is believed that the interest rates may well rise again, when the Bank of England makes their next recommendations, when – or even if they pass this on to savers is still unknown.

Although the savings rates are have been dropping – and although you won’t probably earn as much from a high-interest account now as you may have done in 2018, it will still probably be more competitive than others out there.

Conclusion

So, what should you take away from this? Well, a high-interest savings account can be used for a number of reasons. It could be used to save for emergencies or used to help you save for a down payment on a house – or any other larger purchase you need. It can, ultimately, play a big part in your wider financial plan.

So, if you want an account that helps you to make the most of your savings, whilst still offering access to your money, then this is certainly worth some consideration.

So, look at all of our best high-interest savings accounts and see which is for you. Also, don’t forget to check out other alternatives such as ISAs and bonds to help you reach your savings goals.