What is a linked savings account?
A linked savings account is a savings account that is linked to another account, such as a checking account or negotiable withdrawal order (NOW) by account number.
Linked savings accounts are usually offered in the same bank, for the convenience of the customer. By holding a linked savings account, the client can keep the majority of their funds in the savings account and transfer money to the current account as needed.
How linked savings accounts work
When a customer opens a linked savings account, the bank or financial institution connects it to a new account or a checking account or NOW in the system by account number. By linking the accounts, the client can easily transfer funds between the two accounts. One of the main reasons for its creation is to provide the customer with a practical means of accumulating savings.
Linked accounts are sometimes called pooled accounts. Balances from this account and from chequing or NOW accounts are generally reported on a single consolidated statement. This arrangement also often allows the client to receive a higher interest rate on the savings account on most of the money.
The balances of the linked savings account and the current account or NOW are generally declared on a single consolidated statement.
By offering a linked savings account, it can also allow the customer to benefit from reduced service fees or free verification.
Key points to remember
- Linked savings accounts are savings accounts that are connected to another account, such as a checking account or a withdrawal order negotiable by account number.
- Customers can keep the majority of their funds in the savings account and transfer money to the current account as needed.
- Linked accounts are sometimes called pooled accounts.
- Balances from this account and from chequing or NOW accounts are generally reported on a single consolidated statement.
Use of linked savings accounts
Other types of accounts, such as a certificate of deposit (CD) or a debit card, can also be connected to a savings account under a linked account. With the combination of accounts, there may be new guidelines and rules for the account holder. For example, a bank may set a minimum balance when the interest rate is higher than the yield on a traditional savings account. The purpose of these conditions is to encourage the account holder to continue placing funds in linked accounts.
Conversely, the conditions of a linked savings account can apply the higher interest rate only to funds of a certain amount, in order to attract new customers.
Account holders may face higher costs with linked accounts. If a debit card, for example, is linked to a savings account, using the debit card as often and to the same extent as cash could quickly drain the funding account. If the account falls below the minimum balance, fees may be triggered. In addition, the transactions themselves may incur costs.
Benefits of linked savings accounts
The linked savings account is structured to give the institution an advantage. By offering linked savings accounts, the bank can keep as much business as possible. The terms of these savings accounts can also encourage customers to keep their funds in the account for the long term, with costs and penalties that are triggered against withdrawals. This means that customers who are used to accessing funds from one type of account may not be easily aware of the costs they may incur in pursuing such behavior with linked accounts.
Customers who do not need regular access to their assets also benefit from the creation of linked savings accounts. Not only do they benefit from the potential for higher returns, but customers also have the ability to easily make transfers between accounts.