Saving money takes discipline, and it can be tempting to dip into your savings now and again. That’s where locked savings accounts may come in handy; they limit access to your funds and may impose penalties for early withdrawals, helping you stay focused on your savings goals. This article explores some of the different types of locked savings accounts and their pros and cons to help you consider if they may be suitable savings products for your financial habits and goals.
What is a locked savings account?
Broadly, a locked savings account is a financial product where your money is "locked" away for a certain period or under certain conditions, making it more difficult (or sometimes costly) to withdraw the funds before the term is up. These accounts are designed to help savers stay disciplined and typically earn better interest rates in exchange for limited access to funds.
Some examples of locked savings accounts
Term deposits
Term deposits are one of the most straightforward types of locked savings accounts. You deposit a lump sum for a fixed term – commonly ranging from a few months to a few years – and in return, you get a fixed interest rate for that period provided you hold until maturity.
Pros:
- Fixed interest rates. No matter what happens in the market, your interest rate stays the same for the term provided you hold to maturity.
- No ongoing fees. Term deposits typically don’t come with any account-keeping or service fees.
- No bonus rate criteria. Unlike high-interest savings accounts which often require you to meet certain conditions to get the best rates, term deposits offer a fixed interest rate from the start without any extra requirements, provided you hold to maturity.
Cons:
- Limited flexibility: If you need to access your money before the term ends, you'll likely face early withdrawal penalties (unless you can prove financial hardship).
Notice saver accounts
Notice saver accounts allow you to access your money but only after the required notice period, which is commonly 31, 60, or 90 days. Unlike term deposits, these types of accounts may allow you to deposit money into the account whenever you like.
Pros:
● Flexibility. You can deposit money into your account whenever you like, although you can’t access it without the appropriate agreed notice, forcing you to plan ahead.
● Interest rates may be better than regular savings accounts. Since you're restricted on immediate access, you may be offered slightly better rates.
Cons:
● Access delay. If you urgently need cash, you’ll have to wait for the agreed notice period (unless you prove financial hardship).
● Variable interest rate. Rates can fluctuate over time, so your return isn’t fixed.
Bonus saver accounts
These savings accounts offer a high interest rate as a "bonus" for not making withdrawals or for sticking to specific deposit conditions. For example, you might need to deposit a certain amount each month without taking anything out to earn the bonus interest.
Pros
- Potentially higher returns. If you meet the conditions, the interest rates are often higher than other types of savings accounts.
- Encourages disciplined savings habits. You’re rewarded for consistent saving practices.
Cons
- Conditions can be restrictive. If you don’t meet the conditions (like depositing the required minimum before a certain cut-off date, or not withdrawing during the month) you lose the bonus.
- Easier access than other locked savings accounts. Easier access can make it more tempting to withdraw, which could derail your savings plan.
Choosing a locked savings account
Assess your financial goals and habits
Start by asking yourself: What are you saving for? If you’re working toward a long-term goal, such as a house deposit or retirement, locking your funds away in a term deposit could help you avoid the temptation to dip into your savings. However, if you think you might need quick access to your money, a more flexible locked savings account might be a more suitable product.
It’s also a good idea to consider your spending habits. Are you disciplined enough to avoid withdrawing from your savings? If you're someone who tends to dip into savings impulsively, a term deposit might help you more reliably save.
Compare different types of locked savings accounts
Do your research and compare the pros and cons of each locked savings account type. Term deposits offer a simple, fixed-term, fixed-interest approach, notice saver accounts may work for those who can plan ahead, and bonus saver accounts reward you for sticking to consistent saving habits.
It’s important to think about how much flexibility you need with your money. If you value immediate access, locked accounts may not be right for you. But if your priorities are to maximise interest and meet certain savings goals, a locked savings account could be a good fit.
Consider interest rates, terms, and flexibility
- Interest rates. Are they fixed or variable? A fixed interest rate means your return is fixed no matter what happens in the market (provided you meet the terms and conditions of your account), while a variable rate can fluctuate with market changes.
- Terms and conditions. Are there specific rules you need to follow, like maintaining a minimum balance or limiting withdrawals? Make sure you're comfortable with any restrictions before committing.
- Flexibility. What are the penalties for withdrawing early, if any? Are there any options for adjusting your account if your needs change?
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