Pros and Cons of Saving Accounts

Saving accounts can come in different shapes and sizes. Although they all have an AER interest rate which is usually returned annually. Every bank has at least a few saving accounts that you can select from, alongside their other accounts and investment portfolios.

One advantage of saving accounts is that they usually have higher, or much higher, interest rates than the standard current accounts. Most current accounts have interest rates lower than 1%. However, most saving accounts usually have interest rates that are greater than that. Interest rates can vary, but you can surely find some saving accounts with 2 – 3% interest rates in the UK at least. Some may have higher interest rates than this of more like 4 – 5%. Although, saving accounts with an interest rate more than 5% are hard to find at the time of writing.

As such, in respect of interest rates saving accounts are much better than current accounts. A number of saving accounts may only have a small minimum investment requirement as well, which may not be much more than a current account. Some may also be open saving accounts which you can withdraw from anytime. So, they can have quite a few advantages.

Another advantage of saving accounts is that they do not usually have any additional fees associated with them. Unlike some share portfolios which have extra additional commissions and even some current accounts like the Natwest Gold Current Account do have monthly account fees.

However, it’s worth noting that standard saving accounts, at least, are not tax-free. They will have a gross and net interest rate, with net interest highlighting the actual interest returned after tax. As such, this reduces their interest rates.

Savings accounts are also limited to their interest rates. As such, they are somewhat predictable. When interest rates are low most saving accounts will also have low interest rates between 1 – 2%. These are not especially exciting returns.

In contrast, bonds have higher rates of interests than most saving accounts. Share portfolios, although much less predictable than saving accounts, can also provide much greater returns. UK Premium Bonds may be something of a lottery, but they too can also eclipse saving accounts, especially when interest rates are down.

These are a few of the pros and cons of saving accounts. When interest rates are higher than usual they can be good, but when that it is not the case then some of the other potential alternatives may be worth noting.