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Current accounts - wasted interest

Current accounts are financial products that most of us have. Typically earnings are paid into these accounts and money to pay bills such as the mortgage or rent, utilities and food shopping comes out. Although current accounts have facilities such as standing orders and direct debits, overdrafts and debit cards, they are not the best accounts to hold spare cash.

Many current accounts pay interest of as little as 0.1%. If £1,000 were left in an account paying this amount of gross interest, it would earn £1 interest. However, by transferring this money to a savings account, about 50 times more interest can be earned - £50.

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Even if you want to be able to access this cash easily in case of emergencies or unexpected expenses, no notice savings accounts can be used. These savings accounts allow you to access your cash without notice and some accounts even come with a cash card. Obviously if you choose to open one of these accounts operated via post, telephone or internet there may be a delay in the time taken to receive the funds.

If you think you will be able to leave the cash untouched for a length of time, then a fixed rate savings account may be the answer as these accounts often pay a higher rate of interest than the traditional savings accounts. The fixed term may be for a number of years or until a specific date. Early access to capital in these accounts is usually on closure only or may be subject to a penalty, such as loss of interest, so the benefits will be lost if you need to access funds early.

If you think you may need to access your money but would be willing to give notice to do so, then a notice savings account may be suitable. Notice savings accounts require notice to be given to withdraw funds to avoid any penalty, such as loss of interest. The amount of notice that needs to be given depends on which savings account you choose.

Another option is an Individual Savings Account (ISA). Returns from an ISA are free of income tax and capital gains tax. The tax year runs from 6 April in one year to 5 April of the following year. The maximum investment permitted into a mini cash ISA per tax year is £3,000. ISAs can be instant access accounts (those which do not require any notice to be given to withdraw funds) or notice accounts (those where notice must be given to withdraw funds without penalty).

If rather than having a lump sum sitting in your current account you tend to have some money left at the end of each month, then a regular savings account may be the answer. An amount has to be paid into the account each month but this can be as little as £5. There are often limits as to how much can be paid in each month and penalties for missing payments or making too many withdrawals.