Whilst deposits and withdrawals are easy, these accounts do not have the facilities of a current account such as cheque books. A higher rate of interest is therefore paid.

A deposit account is a useful back up to a current account, with easy transfer from one to the other. As well as being the best place for your cash reserve, the deposit account can also be the first port for your savings, especially for short term objectives, such as a holiday or Christmas.

You need to keep a record of the different amounts you are saving, but there is an advantage in placing them all in the same account, as interest rates may increase with the amount deposited.

Understanding interest rates

Interest rates on deposit accounts may be fixed or variable but the capital value does not change.

There may be higher rates available for notice accounts, where there is a period of notice before withdrawal or a penalty for earlier withdrawal. Thirty days is a common Period but there are accounts available for 60 or 90 days, or even longer. More planning is necessary to avoid Penalties and these are not suitable for your emergency fund.

Another important factor is the amount on deposit. Rates frequently increase at £2,000, £10,000 and £25,000. There may be a minimum balance.

The frequency of interest payments varies, so rates are compared by using the annual equivalent rate (AER), which takes account of the timing of interest payments.

Watch for introductory rates, sometimes called a bonus. These last for a limited period, usually only six months (to attract new investors) and it is the subsequent rate which matters.

The final point on interest rates is that it is the after tax rate which matters for you, so your marginal income tax rate (the highest rate you pay) is a critical factor.

Choosing an account

There is a wide choice of account at all levels of deposit and notice period and the situation is constantly changing, so what is best for you today might be different next month.

However, when interest rates are generally low, unless you are making a substantial deposit the difference will not be great and it is not worth the bother (and loss of interest) of changing accounts for a small increase.

One thing to watch out for, though, is the closure of an account to new entrants, which tends to happen when it has become less attractive and the provider has introduced a new account. They are not bound to notify account holders, although complaints about this have caused some to do so.

Therefore it is wise to check the current rate on your account and compare it with the competition. Comparable rates can be found in newspapers and in Which? and other money magazines.

Using postal and Internet accounts

A number of banks and building societies have postal and/or Internet accounts. The advantage is that interest rates may be slightly higher because the expense of maintaining branches is avoided.

The disadvantage for postal accounts is the delay in transactions, particularly when making withdrawals.

However, return by post is generally quick (except at Christmas time) because they aim to reply the same day, using first class post.

In the case of Internet accounts, transfers in and out are usually from and to a nominated account (such as your current account), which means there is a two stage operation if you wish to transfer the money somewhere else.

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