Opening a savings account: key things to consider

The recent economic turbulence in the UK has had a significant impact on many people’s personal finances, affecting everything from mortgages to pensions. While the situation appears to have stabilised over the last few months, it’s understandable that people may be wondering if their money is still safe in the bank.

Generally speaking, the answer is “yes”.

The Financial Services Compensation Scheme (FSCS) covers all UK-regulated current or savings accounts and cash ISAs. This applies to accounts you have with banks, building societies and credit unions. The FSCS was created by the UK government and is an independent FCA (Financial Conduct Authority)-regulated fund.

The scheme promises that if your UK-registered and -regulated bank, building society or credit union collapses, you will get some of your money back. This is not dependent on either your age or where you currently live.

However, it’s important to note that the amount you can claim through this compensation scheme is limited. If your bank collapses, you can currently claim up to £85,000 per person, per financial institution (or £170,000 for joint accounts). If you have savings over this limit, it’s wise to spread them across multiple financial institutions to ensure they’re covered by the scheme.

Meanwhile, deposits in European-regulated banks are covered by the European Deposit Guarantee Scheme (DGS), which protects up to €100,000 (or the equivalent amount in a European country’s local currency) if the financial institution fails. A separate initiative known as the Swedish Deposit Protection Scheme applies to banks registered in Sweden.

The majority of UK savers won’t pay tax on the savings interest they earn. Thanks to the personal savings allowance (PSA), basic rate taxpayers can earn up to £1,000 per year tax-free. For higher rate (40%) taxpayers, it’s £500. As additional rate taxpayers aren’t eligible for a PSA, all of the interest they earn on their savings is taxable.

However, with UK interest rates rising over recent months, more people could soon find themselves earning enough interest to generate a tax bill. It’s therefore important to review your savings strategy regularly and, if appropriate, consider utilising tax-free savings options like ISAs.

The short answer is no, savings accounts don’t affect your credit score. Because consumer credit reports don’t include savings accounts and no borrowing or debt is involved, savings accounts have no impact on your credit rating. Applying for and opening a savings account will not show up on your credit report, and neither will any deposits or withdrawals you make. However, opening multiple new accounts with separate banks or building societies in a short period of time can affect your credit score.

A credit rating or credit score is essentially a numerical expression based on your credit history which can determine your creditworthiness before a financial institution allows you to take on certain financial responsibilities.

Financial institutions develop your credit rating from consumer credit reports, considering any credit cards, loans (including Hire Purchase Agreements) and unpaid accounts or bankruptcy filings in your name.

You can have as many savings accounts as you like, and it’s something worth considering. For example, you could open a fixed rate bond for long-term savings and have an emergency pot in an easy access account that you can dip into as and when you need to. You might also consider a notice account if you’re saving for something like a big holiday or a new car.

FSCS or deposit-protected savings accounts will cover your money up to £85,000 per person, per banking group, so if you have more than this it’s advisable to spread your money over more than one savings account to ensure you’re covered by the limit.

When you can withdraw money from your savings account depends on the type of account you have.

As the name suggests, easy access accounts allow you to take money out of your account whenever you want. Some do limit the number of withdrawals you can make in a year though, so it’s important to read the terms and conditions before you sign up.

Notice accounts also allow you access to your cash, but unlike easy access accounts, you can’t take money out whenever you want (at least not without incurring a penalty). Instead, you’ll need to tell the bank that you want to make a withdrawal and then wait for the notice period to pass. Notice periods can vary between 30 days and 90 days, depending on the account.

Fixed rate bonds don’t allow you to take money out of your account. They require you to make a full lump sum deposit when you open the account, which you won’t be able to access until the bond matures. If you want the flexibility to withdraw your money, this probably isn’t the right type of account for you.