Ask Our Expert

Fixed Rate Savings Accounts

On the subject of mortgage overpayment, our expert says...

Hi Henry,

Thanks for getting in touch. With the average interest rate having fallen below 1%, finding a decent savings account at the moment is quite a challenge.

It’s also especially difficult to judge savings accounts with variable rates. Many have fallen dramatically following the recent base rate cuts, but not all of them have reflected the latest cut so it’s likely that several will fall further.

You’re right to consider locking your cash away in a fixed-rate account, as this will get you a guaranteed rate of interest for a set period of time. However, there are several things to think about before choosing an account.

Have you got access to rainy day savings?

You say that you are happy to lock-up your savings for a year or two, but if you are going to do this, it’s important that you have access to rainy day funds.

Especially in the current economic climate, where redundancies are increasing, it’s important that you keep some of your savings in an easy access savings account so that you are able to access it in an emergency. It’s recommended that you have access to enough cash to support you and your dependents for three to six months.

If you’ve got this covered, then feel free to lock-up the rest.

Have you filled up your ISA?

If you haven’t made the most of your ISA allowance this year, then now is the time to do it. A cash ISA is basically a tax-free savings account and should be the first place you put your savings.

Not only will you avoid paying tax on your current balance, once you have paid money into your cash ISA it will be protected from tax indefinitely. This means that when interest rates do eventually start rising, you will be able to benefit from great rates without having to pay any tax on interest you earn.

(If you are willing to leave your cash invested for five years or more, then you may also like to look at share ISAs. These present a chance to earn greater return on your cash but are more risky as the value of your investment could fall as well as rise. Indeed, the value of the FTSE 100 has dropped dramatically over the last year. Some people think that now is the time to buy shares, while they are cheap, but you should bear in mind that their value could fall even further)

Download our complete guide to ISAs

Choosing a fixed-rate savings account

Fixed-rate savings accounts guarantee you a set rate of interest for a set period of time (generally one year). If you can afford to lock up your savings for this long, then these accounts are a good way to guarantee a decent interest rate.

However, while it looks more likely that savings rates will get worse rather than better in the coming year, this is not for certain. It’s important to remember that locking your cash away does mean you do lose the flexibility to switch if a better deal comes along.

Currently the best buy for a term of one year is the fixed-rate savings account from ICICI (www.icicibank.co.uk), which is offering 3.90% on balances from £1,000. This is followed by the fixed-rate bond from First Save (www.firstsave.co.uk), which is offering 3.60% on balances from £1,000.

Both of these accounts are with foreign banks, but they are both covered by the Financial Services Compensation Scheme (FSCS). This means that if one of these banks collapsed, your savings, up to the usual £50,000, would be completely protected.

If you fancy sticking closer to home, Birmingham Midshires (www.askbm.co.uk) is currently offering 3.00% on balances from £1 in its Internet 1 Year fixed-rate bond.

Compare savings accounts

High-interest current accounts

If you are looking for great returns on your cash, and you haven’t done so already, you should also look at switching your current account to a high-interest one.

A new breed of high-interest current accounts are offering much better rates than savings accounts, allowing your cash to earn interest rates of up to 6.0%!

The Premier Direct current account from Alliance & Leicester (www.alliance-leicester.co.uk), for example, pays 6.0% on balances up to £2,500 and the rate is fixed for a year. Definitely worth a look…

Ask us a question

If you have a general switching or provider query please email us at ourexpert@creditchoices.co.uk

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