When you have money in savings, you want to keep track of how much interest you’ll earn on it. Even more so if you’re managing a large and diverse portfolio, with savings spread across different types of accounts — from Regular Saver Accounts to Fixed Rate Bonds to ISAs.
This type of arrangement means that the interest you can earn at an individual savings product level can vary significantly. With some savings accounts, the earnings are slow and steady. With other savings products, you can earn a healthy income much faster. There are pros and cons to each.
In this article, we’ll look at:
You need to be nimble to get the best rewards for your savings and maximise the interest you earn. Working with Insignis helps you do just that. Our platform allows you to spread your money across different products, moving your funds when it's right for you. We also have an easy-to-use interest calculator to help you determine how much you could earn from your savings.
There are a few key factors to understand when it comes to interest and how much you’ll earn.
Different types of savings accounts put a different emphasis on the principal amount, interest rate and time period, and these factors work together to determine how much interest you’ll earn.
Interest is applied to savings accounts in several different ways. There are two key types of interest – Simple and Compound – as well as Fixed Rate and Variable Rate products. Each of these will affect how much interest you earn.
As the name suggests, Simple Interest is the easiest way to calculate interest. It’s not commonly used with savings accounts but is sometimes used for personal loans or other consumer products. With Simple Interest, interest is earned only on the principal deposit.
For example, if you have £500,000 in a savings account with an interest rate of 5%, then after one year you’ll earn £25,000 in interest.
However, in year two, even though you now have £525,000 in the bank, you’ll still only earn interest on the principal deposit. This means your annual interest payment will remain the same.
The other type of interest is compounded over time. In this case, you not only earn interest on your principal deposit but also on the interest earned. It’s the most common way that interest is used in savings accounts, which means your money will accumulate faster, making greater gains over time.
Interest can be compounded at different rates – such as annually, semi-annually, monthly or weekly – which will also affect the rate at which your savings will accumulate.
For example, if you put that same £500,000 in savings with an interest rate of 5%, compounded annually, then after one year, you’ll earn £25,000 interest.
In year two, however, you’ll be paid interest on the full £525,000 now in your account, meaning you’ll receive an interest payment of £26,250 – that’s £1,250 more than if the account was using Simple Interest.
After five years, you’ll have £638,140.78 in the bank. If the interest is compounded monthly, after five years, you’ll have £641,679.34.
While most savings accounts use Compound Interest, this can be applied either as a Fixed Rate or Variable Rate. A Fixed Rate means the interest rate remains the same for a set amount of time. In this case, you’ll know how much interest you’ll earn from your savings in advance.
Other savings accounts offer a Variable Rate. This means the rate of interest can change over time. For example, the interest rate might fluctuate according to the benchmark rates set by the Bank of England. Or there may be an introductory rate of say, 7% for one year, followed by a lower rate of 5%.
How much interest you can earn from a Variable Rate is more difficult to predict, but, as we’ll explain later, there are pros and cons to holding money in a savings product offering either rate type.
So, the principle balance, interest rates and time period all matter. But what also matters is how these factors are packaged together into different savings products.
There are many savings accounts to choose from, but there are some common types, and each one will earn you interest on your savings differently. Let’s take a look at how much interest you could earn from different savings accounts.
Regular Saver Accounts often offer a high interest rate, so it follows that you could earn a healthy return on your savings. Sometimes, the rate could be as good as 8%, which is far higher than other products on the market.
This type of account is designed to reward regular deposits. The high interest rate is usually conditional on depositing a minimum amount into the account each month.
While Regular Saver Accounts are a great way to start building up a pot, they often have a limit on how much can be deposited in one go. So, if you want to do something with a large lump sum, this might not be your first choice.
It is also worth noting that the high interest rate is unlikely to last indefinitely, and the top rates on the market are sometimes only available for the first six months.
Regular Saver Accounts can be a good short-term choice, but to keep taking advantage of the best interest rates on the market, there will likely come a time when you’ll want to switch your money to an alternative product.
If knowing exactly how much interest you will earn on your savings is your priority, then a Fixed Rate Bond is for you.
As the name suggests, the interest rate stays the same from the moment you open the account — however, this is conditional to leaving your deposit untouched for a set amount of time.
Average rates currently range from 4.08% to 5.2%*
Another high-interest option is a Notice Savings Account. The condition is that you can only withdraw your money following a notice period. This can be as little as a week or two but is usually between 30-120 days.
The longer the notice period, the higher the interest rate, which means that with this type of account, you’ll earn more money in your savings if you lock your money up for the long term.
This savings option benefits people who are saving large sums of money, perhaps for a house, car, or wedding, and are sure they won’t need to access it in the short-to-medium term.
Average rates currently range from 4.31% to 4.84%*
There’s another type of savings account available in the UK: the ISA, or Individual Savings Account. These are tax-free, which means the benefit from these accounts has less to do with the interest rate and more to do with the savings you make on your tax bill.
There are four different types of ISA, with fixed and variable rates.
Cash ISAs offer easy access to your money; Stocks and Shares ISAs allow you to spread money across investments; Innovative Finance ISAs put your money into peer-to-peer lending projects; and the Lifetime ISA (or LISA) is designed to help you save for your first home or later in life, and gets a top up from the government although limitations on who can open a LISA and when the funds can be withdrawn without incurring a penalty apply).
Currently, you can put £20,000 annually into ISAs (apart from the LISA, which has a £4,000 cap, you can however hold a LISA and invest the remaining £16,000 of your allowance in other types of ISA).
While ISAs don’t boast the best interest rates on the market, they do have the benefit of allowing you to earn interest that is free from tax.
How much interest you earn on your savings can also be influenced by bigger forces which shape how the market operates. This means there will be periods when interest rates are higher, indicating that it’s a good time to save, and periods when interest rates are lower, making it a good time to borrow.
Here are some other factors that determine what sort of interest rates are offered by banks and building societies:
As you can see, a wide range of interest rates can be found across different types of savings products. If you want to maximise the interest earned on your savings, it’s a good idea to spread your money across a diverse portfolio that makes the most of the best deals and bonus rates on the market.
There are thousands to choose from, and it changes all the time. Researching your options is challenging. Seamlessly switching accounts can be harder.
At Insignis, we’ve designed a platform that makes browsing the best rates easy and accessing exclusive deals from many of the savings products discussed in this guide. From one hub, you can spread your savings across multiple accounts, switch according to your needs, and withdraw money at any time.
We make it easy to maximise your savings and keep track of the interest you earn. Ask your Financial Adviser how you can get started today.
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