Should you keep your savings in a current account?

When it comes to finding a home for your cash, you may think opening a savings account should be your first port of call. However, did you know there are a number of bank accounts that offer high interest rates on your money?

So, should you keep your savings in a current account? Let's take a look.

What is the difference between a savings and current account?

Before understanding whether to put your money in a savings or current account, it's important to note the differences between these types of financial products.

What is a savings account?

A savings account pays interest on anything you have in the account. Interest rates can vary massively between accounts, which is why it's important to keep track of the best savings accounts . Usually, easy-access accounts allow you to deposit and withdraw cash at will, though some accounts will limit the number of penalty-free withdrawals you can make per year.

Compared to easy-access, fixed savings accounts work differently. With fixed accounts your money is locked away. Because of this, you can expect to earn a higher interest rate.

Regardless of the type of savings account you go for, opening a savings account is relatively straightforward and usually just requires you to pass an ID check. You can often open savings accounts online, over the phone, by post or in a branch.

Savings accounts: Key takeaways

What is a current account?

A current account (or bank account) offers more features than a savings account. A current account is designed for everyday banking, and allows you to send or receive payments. For example, you can use a current account to receive a salary. You can also use a current account to send payments to people, or companies — including regular payments, such as standing orders or direct debits.

When you open a current account you'll also be given a debit card to make payments, either online or in-person. A debit card also facilitates cash withdrawals through automated teller machines (ATMs). Debit cards are never issued for savings accounts.

Aside from the typical benefits, there are also specialist current accounts that may offer additional features. For example, some 'packaged bank accounts' offer free travel insurance, mobile phone and/or breakdown cover. Other current accounts offer monthly rewards, cashback on purchases, or long 0% overdraft periods.

One very big difference between current accounts and savings accounts is the application process. While you may only need to prove your identity when applying for a savings account, if you apply for a current account you'll usually have to undergo a hard credit check. This is marked on your credit file.

Current accounts: Key takeaways

Current account vs savings account: which is best for savings?

It used to be the case that putting your savings into a current account was a big 'no-no' given the fact that banks rarely paid any interest. However, over the past decade or so, some current account providers have started to offer competitive interest rates.

It should be noted that in order to bag a decent return on your cash in a current account, there are sometimes a few hoops to jump through. For example, some banks will only pay interest on cash held in a current account if you pay in a set amount each month. Others may require you to pay out a minimum number of direct debits each month in order to be eligible to earn interest.

On the flip side, savings accounts are usually far more straightforward. You earn interest from the moment you deposit funds in a normal savings account. Plus, there are rarely any hoops to jump through.

Important: interest rates on current accounts often only apply on small amounts. So, while they can be a smart option if you've only a small amount to save, those with bigger sums may be better off with a savings account.

Regardless of where you decide to put your savings, FSCS savings safety protection can apply to both savings and current accounts. For more on this, take a look at our article that explains why FSCS savings safety is important.

Which savings and current accounts pay the highest interest rates?

When comparing savings accounts to current accounts, it's important to note that we can only really look at savings rates on easy-access accounts. That's because there are no real 'fixed' current accounts.

Interest rates on savings accounts

Right now, you can earn up to 1.5% AER variable interest in an easy-access savings account via Chase Bank. This is a unique savings account, as in order to have access to it, you must open Chase's bank account. If that's not for you, then Tandem pays a slightly lower 1.25% AER variable. Either of these accounts allow you to save from as little as £1.

When it comes to savings, rates can change often. Take a look at our best savings accounts guide to see the most up to date rates.

Interest rates on current accounts

The Virgin Money 'M' account technically trumps the top easy-access savings deal right now. The account pays 2.02% AER interest. However, while it's a striking headline figure, it only applies on the first £1,000 you have saved. Anything above earns just 1% AER interest and this only applies up to a maximum of £25,000.

If the Virgin account isn't for you, Nationwide's FlexDirect pays 2% AER interest on balances up to £1,500, but only for one year. After the first year, the interest rate drops to just 0.25% AER. You earn nothing on anything above £1,500.

To earn any interest with Nationwide's account, you must pay in at least £1,000 each month (excluding transfers from other Nationwide accounts).

How can you transfer money from a savings account to a current account?

Many savings providers won't allow you to simply transfer funds to a current account of your choosing. That's because, for security reasons, many providers will only allow you to withdraw funds to a 'linked' current account. This is usually the account you nominated when you first opened your savings account.

So, if you want to move funds from your savings account to a current account that isn't your linked account, you'll first have to move cash to your linked account. From there, you'll have the freedom to move your money to any account.

How can you transfer money from a current account to a savings account?

The easiest way to shift funds from a current account to a savings account is to use online or mobile banking. When transferring funds, you'll need to know the sort code and account number of the savings account you wish to move money to.