Current accounts, savings or ISAs?

When it comes to saving money in a secure location with a guaranteed rate what gives you the best return: a current account, savings account or ISA?

In this guide we compare current accounts, savings accounts and ISAs to see what the differences are and what you should be looking for when you lock away your money.

To help you choose between current accounts, ISAs and savings, we first need to understand the basics of saving money.

Savings: The Basics

The key factor for most savers is the interest rate or AER, but there's more to it than that. Before you really start thinking about saving money you have to know:

• How much money you have to save. This isn't just how much money you have, but how much money you could afford to lock away for a longer period of time without it impacting your spending

• How long you can afford to lock that money away for. Again, it's crucial to differentiate between money you don't need now, and money you won't need in 6 months, a year, or in three years. Being honest about this question often means you have less to save than you thought, but it also means you are better equipped to choose the right product.

• What return are you looking for? Your money will return a rate of interest on a monthly or annual basis, but you also have to remember tax (if applicable) and inflation will take a chunk out of your actual savings.

• Whether you want your money together. Keeping your money with one provider can be practical and could be financially beneficial in certain cases, but it may also mean losing out on the best rates and limiting your protection in the event of a bank collapse, so decide how important this is to you.

• Whether you'd rather save or invest. Saving money in a current account, ISA or savings account provides security of knowing your money is safe, but it's unlikely to provide the best potential return on your savings. Whilst riskier, investments, stocks and property can all return, and lose you, a higher rate.

Current Accounts

Current accounts are the everyday workhorse of personal finances. They simply store your money in one place and provide easy access in the form of a debit card and online banking, perfect for your everyday needs.

However, in recent years the current account has evolved to the point where many offer competitive rates of return on your savings, as well as providing easy access to your money.

So with current accounts offering a similar, and in some cases better, AER or interest rate in comparison to savings account why would you ever need a separate savings account?

Some current accounts will offer a better return on your money than many savings accounts

Unfortunately, while many current accounts offer high interest rates, those rates are often capped. That means the interest is only paid up to a certain level, only paid on a certain amount of money, or only paid for a given period.

For example, you may see a current account offering 3% AER. However, it's likely that the small print will reveal that the 3% is only paid on the first £1,000 of savings for instance.

Alternatively the level of interest paid may be capped at £100 for example, or the 3% will only be applicable for the first 12 months at which point the interest will revert to a standard 1%.

This is because current account providers are using interest rates as a lure for those households with high levels of savings. While they may reward you in the short-term the banks are hoping you leave your money there for longer, when a dedicated savings account or ISA may offer a better long-term return.

Crucially any savings you have in your current account is also taxable; so make sure to deduct 20% from any interest you hope to make.

Savings accounts

Like current accounts, savings accounts are also taxable, so you need to ensure that whatever interest you make takes taxation into account.

Unlike your current account though, a typical savings account won't have the same limitations on what you earn interest on. Many savings accounts interest rates are time-limited, but you won't be limited by the amount of savings you can earn interest on in the same way.

The crucial factor in choosing a savings account is how long can you afford to lock your money away for.

Typically, the highest interest rates will be offered on the longest terms, but locking your money away for five years requires a serious financial commitment and the resources to cover other costs in the event of your personal circumstances changing.

It's crucial to be realistic about how much you can lock away and for how long. If you underestimate and are forced to take out your money sooner you will usually pay a fee or lose the interest you were entitled to.

ISAs

ISAs are identical to savings accounts except for two factors: they are tax-free and the amount you can save is limited.

The limit for 2016/17 is £15,240 split between stocks and shares or cash, and the full amount can be put in either.

Since they are tax-free ISAs offer a very sensible place to start your savings, and should be topped up if possible each year.