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The Advantages & Disadvantages of a Savings Account

A savings account is not only a safe place to keep your money: it also allows you to earn money on your savings in the form of interest. The interest rate, which dictates how much you will earn on your savings, is linked to the Bank of England's base rate. Interest earned will usually be subject to income tax, but it is possible to save tax-free if you choose to invest in an ISA. Additionally, savings accounts can enable you to manage your money more efficiently and save for specific goals such as a car, a home, or your retirement. The security of a savings account enables you to develop long-term financial plans.

The main benefit of keeping your money in a savings account rather than a current account is that savings accounts offer more favourable interest rates on your account balance. Furthermore, as competition in the UK banking market intensifies it has become common for financial institutions to contend for new customers using competitive interest rates; you may even be offered a savings account which pays bonus interest rates on high balances in addition to a regular interest rate. Such benefits are often offered to new customers or customers who agree not to make withdrawals from their savings account. This is especially true of online savings accounts, which benefit from lower running costs than their branch-based counterparts and can afford to offer quite generous interest rates (see Online Savings Accounts).

A main disadvantage of savings accounts is, in the case of notice accounts for example (see Notice Accounts), that your money is often tied up for a specific period of time and cannot be accessed without incurring large penalties. Additionally, if your account does not have a fixed interest rate, the interest rate you are offered can diminish over time, thus lowering the investment return on your savings. Similarly, if you have a fixed interest rate and the basic interest rates rise, you could be earning less on your savings than if you had a variable interest rate. The main disadvantage associated with stock-market linked accounts is that they tend to involve a lot of risk. If your savings are invested in stocks and shares which increase in value, you may make impressive returns on your investment. If, on the other hand, the stocks and shares fall significantly in value, you may retain serious losses. It is important to assess your attitude to this risk before investing your money in an investment savings account.

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