Types of accounts
Current and savings accounts, and what each is for.
Banks offer two broad kinds of account: current accounts for everyday spending, and savings accounts for money you want to grow or keep for later. Within each there are options aimed at different people. Picking the right mix, and spreading savings sensibly, gets you easy access when you need it and a better return when you do not.
Current accounts: your everyday account
A current account is the one you use day to day: pay goes in, spending and bills go out. They come in a few types aimed at different people. A student account is for people in higher education and often has perks like a fee-free overdraft. A standard account is the ordinary everyday one. A paid-for or packaged account charges a monthly fee and bundles in extras like insurance.
Whichever you have, a current account usually comes with facilities: a debit card, direct debits and standing orders, sometimes an overdraft, and cash machine (ATM) access.
Savings accounts: money put to work
A savings account is for money you are not spending right now. There are several kinds. An easy-access account lets you take money out whenever you like, usually for a lower rate. A fixed-rate bond locks your money away for a set time in return for a set, often higher, rate. ISAs are savings or investments where the interest is tax-free, and come in types like Cash and Lifetime. Premium Bonds pay no interest at all, but each month enter you into a prize draw.
Interest, tax and the base rate
Savings pay interest, a reward for leaving your money with the bank. Current accounts usually pay little or no interest, because they are built for spending; savings accounts pay more, which is the reward for leaving your money there. How much depends partly on Bank Rate, the rate set by the Bank of England (the specification calls this the base rate), though each provider sets its own rate on top of that.
Interest can be taxed, but many people have a tax-free savings allowance, and ISAs are tax-free by design. The rules can change with government policy, so it is worth checking rather than assuming.
Matching the account to the saver
Different accounts suit different people and goals. The trick is to match the account to what the money is for: quick access for money you might need soon, a fixed rate for money you can leave alone for a while.
| Account | Might suit someone who... |
|---|---|
| Easy-access | wants to withdraw money at any time, for example for emergencies (usually a lower rate) |
| Fixed-rate bond | can lock money away for a set term for a set, often higher, rate |
| Cash ISA | wants savings where the interest is tax-free |
| Lifetime ISA | is saving for a first home or later life, and wants the government bonus |
| Premium Bonds | prefers the chance of a tax-free prize instead of guaranteed interest |
Spreading savings across more than one type can help: keep an emergency buffer in easy-access, and put money you will not need soon into a fixed-rate account for a better return. That way you get quick access and a stronger rate, not just one or the other.
- 'A current account and a savings account are much the same.' A current account is for everyday spending; a savings account is for money you leave to grow, usually at a better rate but with less easy access.
- 'The bank sets the interest rate out of nowhere.' Rates are influenced by Bank Rate, but each provider chooses its own, so it pays to compare.
- 'Premium Bonds pay interest.' They do not. Instead of interest, they enter you into a monthly prize draw, so the return is a chance of a prize, not a guaranteed rate.
Key terms
- Current account
- An everyday account for paying in and spending.
- Packaged account
- A current account with extras bundled in for a monthly fee.
- ISA
- A savings or investment account where the interest is tax-free.
- Easy-access account
- Savings you can withdraw at any time.
- Fixed-rate bond
- Savings locked away for a set term at a set rate.
- Bank Rate
- The Bank of England rate that influences savings and borrowing rates (the spec calls it the base rate).
Not examined
Check your understanding
- Who is a student account aimed at, and what is one perk it often has?
- Why might someone split their savings between an easy-access account and a fixed-rate account?
- What influences the interest rate on a savings account?
Show suggested answers
- People in higher education; it often includes a fee-free overdraft.
- To keep some money reachable for emergencies while getting a better, more certain rate on money they will not need soon.
- Bank Rate influences it, but each provider sets its own rate, so they vary.