Five Steps To Smarter Saving

Answering these five simple questions will enable you to choose the perfect savings account to suit your needs.

With thousands of accounts on offer this summer, choosing the ideal savings account can be a real chore. Even the list of different types of savings accounts is impressively lengthy. We can choose from cash ISAs, children's, easy-access, fixed-rate, monthly interest, no-notice, notice, offshore, over-50s, regular-savings and variable-rate accounts. Phew!

However, I have a cunning plan. I've come up with five simple questions, the answers to which will enable you to choose a savings account that is right up your street. Here they are:

1. Taxable or tax free?

Every adult in the UK has a tax-free personal allowance of £6,035 for the 2008/09 tax year. In other words, if your total income is below this threshold, then you won't pay tax on your savings interest. In this scenario, you don't need to worry about the taxman grabbing any of your interest, so you can skip to the next question.

However, basic-rate taxpayers lose a fifth (20%) of their savings interest to HM Revenue & Customs (HMRC). Higher-rate taxpayers pay twice as much tax, handing over 40% of their interest to HMRC.

To avoid this largely needless loss, it makes sense to put a slice of your stash into tax-free savings accounts. For taxpayers, I suggest putting the first £3,600 of your savings each tax year into the most popular tax-free savings account: a cash ISA. For example, the Best Buy Icesave Easy Access ISA pays a tax-free 6.10% AER on £1,000+.

2. Lump sum or regular saving?

The next question to ask yourself is whether you want to deposit a lump sum or to squirrel money away every month.

If you are able to save a set amount every month for at least a year, then you can grab some of the highest interest rates around. Indeed, if you can set aside £10 to £500 a month for an entire year, then you can earn 7% to 10% a year before tax. For instance, the Halifax Children's Regular Saver pays a mighty 10% AER on monthly deposits of £10 to £100.

3. Easy access or locked away?

The next step is to decide whether you need unrestricted access to your money, or if you are prepared to put it in handcuffs.

It used to be the case that you would earn higher rates of interest by locking away your money in a `notice' account. However, these days, this rule rarely applies. For example, Chelsea BS pays 6.50% a year on £250+ in its 90-Day Notice account. However, the popular Kaupthing Edge easy-access savings account pays the same rate on £100+, but with no withdrawal restrictions.

4. Fixed or variable?

Most savings accounts pay a variable rate of interest. In other words, their rates tend to follow the general direction of interest rates. So, when the Bank of England raises its base rate, many variable-rate savings accounts follow suit. On the other hand, if you rely on savings interest to boost your income, then you may prefer the security of a fixed rate of interest.

Second-guessing the future direction of interest rates is a mug's game. Nevertheless, thanks to an ongoing credit crunch, there are some fantastic deals to be had from fixed-rate bonds. Here are two of my favourites for cautious savers:

5. Standard or specialist?

Your fifth and final test is to check to see whether your personal circumstances enable you to gain access to specialist accounts which pay top rates of interest.

For instance, banks and building societies are very keen on the `Golden Generation': the over-fifties who have heaps of spare cash to save. Recent years have seen the launch of dozens of savings accounts aimed at `senior savers', such as SAGA's Online Tracker Account for the over-50s, which pays 6.23% AER on £1+.

So, there you have it: five simple steps to help you choose a superior savings account. Here's wishing you many years of happy hoarding!

More: Find a super savings account today! | Super Savings Accounts That Slaughter Inflation | Top Savings Accounts For New Starters