What is a Savings Account?
A basic savings account is a way of putting money aside by depositing it in a bank or building society account which then pays interest on the money at a particular rate.
It's important to shop around for the best rate if you're thinking of opening a savings account. The easiest way to do this is to use a reputable price-comparison website such as Money Supermarket. You will be able to compare interest rates and also the rules surrounding withdrawals and the penalties for breaking them, as well as features and benefits of various types of account.
The main difference between a savings account and a current bank account is that the money is no longer 'available' to use for transactions, as it has become an investment.
Some account providers offer accounts which allow one or two cash withdrawals per year, but many do not even allow this without penalising the account holder by making them pay to withdraw their money or reducing the interest rate
With the advent of the internet, some savings account providers also offer an online-only option which will normally offer a slightly better rate of interest because the provider's overheads are far less than for a traditional brick-and-mortar institution.
There are numerous variations on a theme, such as ISAs and National Savings Accounts, which may offer higher or lower interest rates as well as certain tax advantages but the interest rate for a standard savings account is determined by the Bank of England base rate.
Average Interest Rates for the Last Thirty Years
There was quite a bit of fluctuation in interest rates over the course of this decade with a good start in 1980 of 10.50%. Rates dropped slightly to an average of 7.91% over the next six years, then from 1987 they rose again up to a high of 12.02% in 1989.
The 1990 saw an all-time high of 14.23%, which dropped a little to 11.37% in 1991. The 90s recession then saw an almost constant decline in interest over the next seven years, ending on a low of 4.25% in 1999.
The interest rates for savings accounts did not recover over the next decade, starting at 5.00% in 2000 and ending on an all-time low of 2.75% in 2009, at the start of the next recession.
The present-day average interest rate for a savings account remains low at 2.50%, a reflection of the Bank of England base rate of just 0.5%.
Money placed in a savings account today is earning very little interest when compared to the rates available in the boom years of the 1980s. Better than standard rates are sometimes available and investors planning on opening a savings account are strongly advised to carefully research all available options to find the most suitable one for their individual circumstances.