If you have savings, you now have to work harder than ever to earn a decent return on your cash. That’s because your easy access savings account is likely to be paying pitiful rates of interest.
One option to boost your interest is to open a fixed-term savings account, but should you? And what are the pitfalls to bear in mind?
[top_pitch]
Savings accounts: the current picture
If you don’t know the interest rate on your savings account, it’s likely you’re earning a terrible rate. That’s because there are a number of lousy accounts out there – and many of them come from big-name providers!
Right now, Halifax, RBS, and Santander all have easy access accounts paying a shameful 0.01% interest. To put that into context, £10,000 stashed in one of these substandard accounts, will earn just £1 a year.
To get ahead in the easy access savings game, you have to move accounts often, as market-leading rates rarely last. Yet even if you do chase the best rates, getting anything close to a ‘decent’ return is still a challenge.
Currently, the highest interest rate on an easy access savings account, from Coventry Building Society, pays 0.65% AER variable. The next-highest is from Tesco Bank, which pays 0.59% AER variable. While both are better than nothing, they’re hardly worth shouting about.
However, right now it is possible to boost the interest rate on your savings by shunning easy access and opting for a fixed-rate savings account instead.
Earn 2% with a fixed-rate savings account
If you’re looking to get the highest interest rate on your cash, it’s possible to earn 2% interest.
To get this rate, you’ll have to open an account with Recognise Bank and be happy to lock away your money for five years. If this appeals, then you can earn 2% AER fixed interest on up £85,000. To get the account you must open it online and deposit a minimum of £1,000. You have the choice of receiving your interest every month, or on an annual basis.
If locking away your cash for half a decade isn’t for you, then you can earn a respectable 1.75% AER through Atom Bank, which is fixed for three years. If you’d prefer a two-year fixed term, you can earn the same rate of interest via Allica Bank.
Alternatively, Allica Bank also offers a one-year fixed-rate savings account paying 1.4% AER interest. This is still comfortably higher than any easy access options.
[middle_pitch]
What should you know about a fixed-rate savings account?
Fixed-rate savings accounts have two obvious plus points. Firstly, the interest rates on these accounts are often far higher than easy access options. Plus, unlike easy access accounts, the interest rate is fixed, meaning that it can’t go down for the duration of the fixed term. This gives you a great degree of certainty.
However fixed-term accounts come with drawbacks too.
Your money is locked away
One of the most obvious drawbacks is that your money is locked away. To put it bluntly, this means that you won’t be able to access your cash for the whole duration of the fixed term. For this reason, you should never put all of your savings into a fixed-term account, especially if you like the security of having a rainy day fund that you can easily withdraw from.
The interest rate can’t rise
With a fixed-term savings account, the interest rate cannot go up. While this may seem a strange factor to consider in the current ultra-low interest environment, should the Bank of England increase its base rate in the near future, it’s likely that easy access rates will also increase.
If this happens and your money is locked away in a fixed savings account, then you’ll miss out. For this reason, the longer you fix for, the bigger the gamble you are taking that interest rates will remain low for years to come.
Inflation can impact the value of your savings
On a similar note, anyone with savings should understand the importance of inflation, and how rising inflation can impact the value of your cash. For example, should inflation take off, then any money you have locked away in a fixed account may lose its value, and you won’t be able to do anything about it in the short term. For more on this point, see our article on how you can protect your savings from inflation.
Keen to learn the best places to stash your cash? Take a look at our top-rated easy access accounts, and our top-rated fixed-term savings accounts.
