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Tips for choosing an online savings account

There are lots of options available to you when choosing an online savings account. Whether you choose to save for a rainy day or want to invest a lump sum, it is important to get the best return on your savings.

There are four main types of savings accounts:

  • Easy access accounts allow you to withdraw your savings at any time, usually with no penalty charges.
  • Notice accounts require you to provide a set period of notice before making a withdrawal.
  • Bonds or fixed rate accounts require you to leave your money locked away, for a set period of between one and five years, in return for preferential interest rates.
  • Regular savings accounts offer higher rates of interest, but there will be restrictions on the amount you can save, and you will have to make regular deposits each month.

Online savings accounts are provided by many High Street banks and building societies and dedicated online banks.

When comparing online saving accounts note the interest rate, how much you can save regularly, and how often you will want to withdraw money. If you are saving for a special occasion, such as a wedding, then you may want to consider your saving goal and work back how much you will need to save to reach it.

Any interest earned on your savings will be subject to Income Tax. The rate of Income Tax you pay will depend on the amount you earn. Most accounts will apply 20% tax on your saving's interest. If you pay a higher rate of tax, you will need to pay more. Children and low earners need to inform your account manager by completing form R85 from the Inland Revenue, so that you receive the full amount of interest.

Taxpayers can save up to £5,340 tax free in the current tax year with a cash ISA. An ISA usually requires a lump sum deposit or a regular monthly payment to be made.

Many banks and building societies will provide incentives when you open or operate an online savings account with them. Bonuses may apply for a period when you open your account, perhaps a higher interest rate or a bonus if you do not make any withdrawals.

Always check what happens when you need to make withdrawals. Some accounts you will have to withdraw all your savings. Others will limit you to the amount you can withdraw or the number of withdrawals you can make in any 12-month period.

Check the interest rate that applies to your savings and the thresholds that apply. You may need to move your money to another savings account when it reaches £1,000, or more, to get a better rate.

To safeguard your savings, the Financial Service Authority protects the first £85,000. If you have more savings than this, then consider putting your money in other accounts not affiliated with the same bank or building society.

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