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Financially savvy people know that it’s a good idea to keep a rainy day fund in cash, but unfortunately, the interest you can earn on it has been disappointing in recent years. The good news is there are now some better rates available if you are prepared to shop around and switch savings accounts.

What is an interest-paying account?

It’s any type of savings account where you can earn a return on your cash in the form of interest. It could be a Cash ISA, a savings account linked to your bank account, or a savings bond where you lock your money away for a few years. At the moment interest rates are high so there are some really great savings accounts deals as providers compete to look after your savings.

Interest-paying accounts: the benefits vs the risks

Sometimes you get an introductory interest rate on a savings account for the first year, and then your provider automatically moves you to a paltry standard rate. If you don’t switch at this point, you could lose out. In fact, financial watchdog the FCA is considering changing the rules around easy access savings accounts, forcing providers to offer savers a single easy access rate 12 months after they open an account.

Another risk is that of higher inflation– if the prices of the everyday goods rise faster than the interest you can earn on your savings, the purchasing power of your cash diminishes over time. Inflation in the UK is currently rising so many cash savings accounts are now offering very high interest rates. However, there is also the risk the Bank of England could cut interest rates in future, and banks could pass this on to consumers with worse deals on their savings products.

How to get the highest-interest savings account

Usually, you will get a better rate if you can lock your money away for a few years on a fixed deal. The longer the better: five-year fixed-rate bonds will usually pay more interest than one-year bonds, for example. This is an advantage but could also be a risk if you later find you need access to your cash and have to forfeit interest to get it, or better rates become available elsewhere but your money is locked in.

Is my money safe in a high-interest paying savings account?

Yes. An important benefit of interest-paying accounts is that they will usually (if the provider is regulated) be covered by the Financial Services Compensation Scheme (FSCS) which protects your savings up to £85,000 in the event your bank goes bust.

How can I choose the best interest-paying account?

To get the best interest on a savings account you need to look for the AER, which stands for Annual Equivalent Rate, this is the rate you need to compare rates across different providers.

Is it possible to get better returns than interest on a high-paying savings account?

For an alternative to cash savings accounts, you could take a higher-risk approach and invest some of your cash in an investment ISA for the potential to earn higher returns. However, it is worth noting that with a stocks and shares ISA, the stock market can go up and down. If it goes down your savings will be worth less.

Alternatives:

You may also be interested in these other types of savings accounts: