How to choose a savings account

We go through the different types of savings products to help you choose the right one for you. We also include our top recommendations.

There are a wide variety of savings accounts, so how do you choose? You don't do what a relative of mine did recently, which is go to your bank and ask one of the people in suits! These salespeople will sell you the products which make them the most commission and the bank the most money.

They even manage to make some pretty naff products sound amazing. Be particularly concerned if they're linking a savings product with another product, such as an investment, insurance or current account. Do not trust your bank manager no matter how convincing. He/she is a salesperson. If it sounds too good to be true it's because it is!

Choosing a savings product can be tricky, so here's a run-down of the main different types:

Flexible savings

Most people should have a good portion of their savings in an easy-access account, so they can access money swiftly. Many accounts let you put in as little as £1, and you can add to or withdraw from it as often as you like.

Most of these accounts have variable interest rates, but if it comes with a large, fixed 12-month introductory bonus this will limit the amount that the rate can be reduced for a while.

The largest trap to watch out for is that some so-called 'easy access' accounts penalise you for withdrawing money. There should be no penalty.

My favourite at the moment is the ING Direct Saving Account which is fixed at 3% for 12 months.

Put money aside each month

If you want to put £1 to £500 aside each month and you don't need the money for one year, you can find savings accounts designed with this in mind. They're usually called Regular savers. You're looking for an interest rate that's fixed quite a bit higher than an easy-access account's rate to make it worthwhile locking your money up in this way.

My favourite at the moment is Norwich & Peterborough's Family Regular Saver, which allows one withdrawal and pays 6% if you hold it for a full year.

Lock money away for higher returns

Bonds are savings accounts that lock your money away for an agreed period, typically one to five years. To lock your money in for a year you should expect a big premium over and above easy-access accounts and no onerous catches. At present there are no such accounts, the best being the Post Office's One Year Growth Bond with 3.85% fixed for one year. Not enough, in my opinion.

You can get bonds that fix for longer than a year but they're rarely worth it. Looking at accounts available today and considering the risk of rapidly increasing inflation sometime within the next few years, I would certainly not fix for more than a year. Indeed, I wouldn't lock all of my savings up in a bond right now even for just one year. It's best to keep a good portion of your savings flexible.

Savings accounts with notice periods

Some savings accounts require notice periods to withdraw money, typically 30 to 120 days. These are notice accounts, which usually have variable interest rates. These should offer a higher rate than easy-access accounts (and a lower rate than bonds) but in practice they're often the same as easy-access accounts. This is the case right now, so there is no point recommending one. Why lock your money in for longer for the same interest rate but with worse terms and conditions?

Guaranteed equity bonds

Each bank has its own name for this product, which is actually an investment product that's often sold as a savings one. I can't think of anyone for which these products are suitable. They are extremely expensive even though they appear to be free. (Ask yourself: how does the bank make money from this? The fact that you can't work it out should disturb you!) If any bank offers for you to invest in the stock market without risk, avoid the product.

Tax-free savings

Most of the above accounts can come tax-free, too, in ISAs (individual savings accounts). People should try to use their tax-free allowances each year. Each year you can put up to £3,600 into a cash ISA, which is a tax-free savings account.

Most of the best cash ISAs are easy-access: you can withdraw money or move it to another account without penalty or a notice period. If you withdraw money from an ISA rather than move it direct to another ISA, you will lose that part of your tax-free allowance forever.

You can find ISAs in many of the categories above, namely easy-access, regular saver, notice accounts and bonds. Here are the top ISAs at present, taking into account not just the interest rate but the terms and conditions as well (and excluding tied products):

Easy-access ISA. First Direct's ISA is easy-access and fixed at 2.6% for one year. You can transfer in all your other ISAs, if you choose.

Regular saver ISA. Britannia Building Society's offering of 3.1% is the only one worth considering. The interest rate isn't great for a regular saver, but you can make one withdrawal in the year without penalty, so you should be able to access your money in an emergency.

Notice accounts. There are no good ones at present. There rarely are.

One-year bond. Principality Building Society is offering an ISA at 3.2% for one year, although you must apply in-branch. Transfers in are not allowed. If you can't get to a branch, there is Cheshire's 12 Month Fixed Rate ISA at 3%, which is available by post. (You can print forms online.)

Maintaining your savings accounts

At least once a year you should consider whether your money is still in the right sort of account for you. In any event, with most accounts you need to switch once a year, because banks rely on your lethargy to keep you, rather than reward you for loyalty.

Serena Cowdy looked at other options in her recent article on Top savings accounts to suit everyone.

> Compare savings accounts through lovemoney.com.

> Read Stop overpaying your mortgage!

> Read The ultra cheap way to invest in shares.