Pros and cons of fixing your savings rate

Published:
13 December 2012
Topic:
News,Money,Savings

Savers fed up with plummeting returns may want to protect themselves against further falls by locking into a fixed rate account - but you should think carefully before tying up your cash.

The fixed rate savings market has seen a couple of new additions recently, with Principality Building Society launching new nine and 18-month fixed rate bonds. While returns on these accounts aren't the best available, they at least indicate signs of life in the market.

But should savers lock in now, or wait to see what the future holds? Here we consider both the pros and cons of fixing your savings...

New additions to the fixed rate savings market

Principality Building Society's 18-month fixed rate bondpays an annual equivalent rate (AER) of 2.40% on a minimum investment of £5,000.

While this rate is lower than the current market-leading bond over this timeframe, which is from Santander and pays 2.90%, the Santander bond is only available to customers of its 123 account, whereas Principality's account is open to all savers.

The Principality's nine-month bond, meanwhile, pays 2.10% AER on the same minimum investment. Both accounts enable savers to receive interest either annually or monthly, which is useful for those looking to supplement their income.

The maximum amount that can be held in either of these bonds is £250,000, but if you are planning on depositing a large lump sum, remember that only the first £85,000 is protected by the Financial Services Compensation Scheme (FSCS).

In common with most other fixed rate accounts, Principality's bonds do not allow withdrawals, and you cannot make any additional deposits once the bond is open, nor can you close the account early.

So, is now the time to fix?

Back in 2009 when the Bank of England base rate first fell to 0.5%, no-one could have predicted that interest rates would remain down there for such a long time.

Anyone who locked into a fixed rate account just before the base rate fell is likely to have done much better than if they'd left their money in an easy access account.

According to economists, interest rates are unlikely to rise until 2014 at the very earliest, with some predicting that an increase won't happen until 2017, so locking into a fixed rate account now may therefore not be a bad idea, especially if you think savings rates have further to fall.

Thanks to the Funding for Lending Scheme, which has provided banks with £80 billion of cheap funds to lend with, banks and building societies have had little incentive to offer competitive rates to draw in savers.

And this has been noted in dramatically falling rates across all kinds of savings accounts. There is also little sign of things improving any time soon.

Currently, the top rate of interest you can earn on an easy access account is 2.35% from either the Post Office's Online Saver (Issue 8) or Marks & Spencer's Everyday Savings account.

The rate on Principality's 18-month account beats both of these, but the downside is you won't be able to get your hands on your cash until 2015.

Several other fixed rate accounts pay even higher rates of interest depending on how long you are prepared to tie up your cash.

Close Brothers Select Gold 3 Year Fixed Term account, for example, pays a respectable annual equivalent rate (AER) of 3.30% to savers who can afford to tie up their money for this length of time, but you'll need a hefty £10,000 minimum deposit to qualify.

The account can be operated by post, online and via telephone.

If you don't have this much to invest, then Vanquis Bank's Five Year Fixed Rate Bond, which can be operated online or by post, pays 3.16% AER on a minimum investment of £1,000, but you will need to leave your money untouched until 2017 as you cannot close the account early or make any withdrawals.

Pros and cons of fixed rate savings

If your biggest worry at the moment is that rates could fall further, then a fixed rate account will provide peace of mind that returns on your cash won't change for the term of the account.

Fixed rate accounts are also handy for those looking for financial discipline as you generally will not be allowed access until the end of the fixed rate period.

However, bear in mind that the longer you fix your savings for, the greater the risk that rates will start to go up and your money could be left behind in an account that is no longer competitive.

Remember too that in the event of an emergency you won't be able withdraw any money, so you will need access to cash in a current account or easy access savings account too.

If you are nervous about tying up your money for a long period of time, one compromise may be to consider a shorter-term fixed rate account.

That way if rates do start to rise, you can take advantage quickly. Bank of Baroda's MAX 1 Year Fixed Rate Bond, for example, which is exclusive to MoneySupermarket customers, pays 2.70% AER and can be opened with a minimum investment of £500.

Alternatively, United Bank's one-year Fixed Rate Bond pays 2.55% AER and can be opened with £2,000.

Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.

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About This Author

Melanie Wright

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Financial journalist

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