By Kate Saines
In times of low interest rates, fixed-rate savings accounts are always going to be a winner.
They offer certainty, and a more lucrative alternative to the insecure world of variable rates, which are currently poor to say the least.
And, as is they were not already alluring enough, the once forbiddingly low rates offered on short-term fixes have now started to become far more competitive.
But if you are considering ditching your variable rate savings account for something more permanent, there are pitfalls to watch out for.
Here’s how to find the best fixed-rate savings account at the moment.
What are fixed-rate savings accounts?
You will probably already know that fixed-rate savings accounts are products which allow you to deposit money in return for interest at a specified, rigid rate which will not change.
It doesn’t matter what happens to the Bank of England base rate, inflation or any other index or company share price, your fixed-rate will remain the same.
Whatever fixed-rate product you choose, you’ll only be able to benefit from the rate for a certain period of time. This can vary between six months and five years.
Fixed-rate savings products come in different forms. Fixed-rate ISAs are a popular option as they allow you to invest your savings (provided they do not exceed your annual ISA allowance limit) tax free.
You can also invest in fixed-rate bonds, which offer higher rates but require bigger deposits. And of course you can use a standard fixed-rate savings account.
What are the pros and cons?
At the moment fixed-rate accounts offer better rates than variable-rate accounts. This is because the Bank of England base rate continues to remain at its low of 0.5 per cent and most variable accounts track this.
The big problem with fixed-rate accounts is that in order to get the higher rate you must lock your cash into the account for the specified period.
You will not normally be able to make withdrawals in this time, and if you do need the cash urgently you will be penalised if you withdraw it.
Likewise, if you want to move your cash to a variable rate account because interest rates are rising, you’ll either have to wait or pay a penalty.
Clearly the shorter the period you lock your cash in for, the greater flexibility you are allowing yourself. But, you tend to receive lower rates for shorter-term fixed rate accounts.
Take the latest offering from the Post Office, the Fixed Rate Cash ISA Issue 6. While the one year ISA offers a rate of 3.2 per cent, you’ll get a much healthier four per cent if you lock in for three years.
Use the Myfinances.co.uk comparison tables to find the best deal on fixed-rate savings accounts.
Getting the best rate
The good news in the fixed-rate savings world is the gap between the interest rates on short-term accounts and long-term products is now narrowing.
Money expert, Andrew Hagger of Moneynet, said: “Savers are desperate to get the best deal they can, but with the rate differential between a four-year deal and a one-year deal just 0.70 per cent, the incentive to opt for a longer-term has faded.”
In February, Mr Hagger explained, this difference was 1.35 per cent. This tightening of rates was highlighted when, in July, a one-year fixed bond with a rate of 3.55 per cent soared to the top of the best buys list.
The product, the Norwich and Peterborough Building Society E-Bond, said Mr Hagger, was offering a rate which had not been bettered on a one-year fixed bond for almost 18 months.
But if you are keen to sniff out these deals, it’s the building societies you need to look to not the banks.
Mr Hagger said: “While mutuals and niche players battle it out for short-term retail deposits, this is obviously not part of the strategy employed by the high street banks highlighted by the fact they don’t appear at all on the current top ten one year fixed rate deals.”
Research by HSBC backs this up. It found the change in income on the average six-month bond between January and June this year has been a very healthy 25 per cent.
The average one-year bond meanwhile has seen an income change of one per cent over this period. But the average 18-month, two, three and four years bonds have suffered dramatic drops in their incomes.
HSBC said the average investor in a three-year fixed-rate bond will see their income fall by 36 per cent if they re-invest this year. An investor who reinvests into a short-term six-month fixed-rate product meanwhile will enjoy a 25 per cent increase in returns.
David Wells, head of pensions, savings and investments at HSBC, said: “By fixing their hard-earned savings into a product for a specific amount of time [savers] can often earn higher returns when compared to other accounts available at the same time.
“However, those who want to reinvest savings from matured fixed-rate products into similar products may find that their income drops significantly – an especially nasty shock for those preparing for retirement.”
He urged savers in this position to seek financial advice before reinvesting their savings in a similar product.
If you are sold on the great rates, but still unsure about diving into fixed-rate savings products because of the lack of flexibility, there may still be options out there. Do a bit of delving and you’ll find some products which offer access to fixed-rate savings.
Leeds Building Society recently unveiled a fixed-rate ISA offering not only 3.25 per cent interest, but access to 25 per cent of the funds without notice or penalty.
Kim Rebecchi, sales and marketing director at Leeds, said: “The high return combined with access allows savers to keep their options open.”
These deals are not common, and only tend to last for limited periods, so you’ll need to be on the ball and take action quickly.
Other banks, might offer you access but only by sacrificing 90 days’ interest. Whilst not ideal, if you simply want to have the option of a bit of flexibility – to cover you for a financial emergency for example – this could be a good option.
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