Fixed-rate vs instant-access savings: are you losing out?

With British savers losing an average of £551 million last year by not fixing the interest rate on their savings account, is it time for more people to consider the merits of moving away from instant-access products in favour of other options?

According to the data published by first direct, this equates to each individual missing out on around £57.14 in interest in 2011. While this is lower than the amount savers lost in 2010, it is still a reasonable sum of money that most people would like to see added to their savings pot. The organisation acknowledged the gap between interest rates offered on fixed-rate and instant-access products has closed due to the base rate remaining at a historic low.

However, the 0.5 per cent threshold cannot stay in place forever, which means savers need to keep an eye on the decisions made by the Bank of England and adapt their strategy for building up a nest egg accordingly.

Why choose fixed-rate accounts?

The main draw of fixed-rate savings accounts is the higher rate of interest. While you should always bear in mind that you won't have access to your money for a specified period (usually between one and five years), this is unlikely to be an issue if you have a particular savings goal in mind.

Fixed-rate accounts are most suitable if you have a sizable deposit. In many cases, you'll require a minimum amount, for example £1,000, to get started and you won't be able to add to this sum for the duration of the term. However, this does mean you can get any existing lump sum you have accumulated to work harder for you, while continuing to save using a different type of account.

A further advantage of this type of savings vehicle is that it removes the temptation of dipping into your funds when you don't really need to. By knowing you can't access your cash without incurring a penalty, you'll be much less inclined to make a withdrawal unless it is absolutely essential.

Selecting the best fixed-rate account

It's important to shop around when looking for this kind of product – and don't forget to consider offshore fixed-rate accounts, as these can sometimes offer a more favourable rate than those provided by high-street banks.

Ultimately, the right account for you will be dictated by your personal circumstances and your savings goals, so make sure you are clear about what return you hope to get from your nest egg, as well as what you need the money for.

For instance, if you're saving for a deposit on a house, decide how much you need to save and when you want to have this by. If you plan to purchase a home within the next two years, it's not advisable to tie your money into a five-year fixed-rate product.

The amount of cash you have to put away will also be a factor, as some financial institutions will require a higher deposit than others. As a general rule, you can expect to receive a more favourable rate if you have more cash, so do your research and plan accordingly.

If you are concerned about the base interest rate rising while your money is locked up in this type of product, choose a one-year fixed-rate account rather than an alternative that runs for a longer term.

Is instant-access ever better?

In some situations, an instant-access savings account will be more suitable, such as if you are just starting to build up a nest egg or are concerned you may need to dip into your savings to cover unexpected expenses.

There is no right or wrong answer when it comes to choosing the right savings account, so you have to make a decision based on your circumstances and make sure you reassess your strategy for setting money aside as your financial position changes.

Director of savings and investments at Post Office Richard Norman recently commented: "It is important to look after your finances and ensure you invest in finding the right savings vehicle for your needs. Whether you want instant access to your cash, are willing to wait for a fixed period before accessing your money, or want the best tax-free deal, there is a savings account for you. I would urge all savers to choose wisely to get the most out of their hard-earned cash."

So, follow his advice and consider all the options to make sure you get the best-possible return on your funds.