A new investigation from Which? Money has revealed the pitfalls you face when placing your money into a fixed-savings account, and shows how you can avoid the fixed-rate tricks to maximise your returns.
Fixed-rate savings accounts have traditionally offered more generous rates of interest in return for savers giving up access to their cash for a set term, usually between one and five years.
Having a guaranteed interest rate over a fixed period means that you’ll avoid the hassle of switching regularly in order to maintain a decent return, but if you don’t take action before your fixed-rate savings mature, you could find your money tipped into an account paying as little as 0.05%.
Alternatively, your savings could be transferred to another fixed-rate account, leaving you with limited time to withdraw your cash before it’s tied up again.
Fixed-rate tricks to watch out for
- Time is money: Make sure the bond you apply for starts paying the headline interest rate from day one, as providers can delay the rate until a set date. NatWest, for example, was offering a rate of 2.25% on its fixed-rate cash Isa for applications made between 26 February and 25 March 2013, but this rate did not actually kick in until 22 April 2013
- Fixed-rate, fixed amount: Fixed-rate products are lump-sum investments and you usually can’t add any more money during the term, so be sure of the amount you want to deposit before opening an account.
- Beware of penalties: Be sure that you won’t need to access your savings before the end of the fixed term as early withdrawals often result in penalties which typically involve a loss of interest.
- Don’t roll over: Your provider should notify you in advance that your fixed-term is coming to an end, but it’s still worth keeping a note of the maturity date so that you can start looking for a new home for your savings several weeks before this point. If your provider does not receive any instructions from you, it’s more than likely that your savings will be ‘rolled over’ into a new account – often one with a considerably lower interest rate.
- Fixed-rate cash Isas: Are you a taxpayer who hasn’t used up your allowance for the current year? If so, it’s worth considering a fixed-rate cash Isa in the first instance, as interest is paid tax-free.
Would a fixed rate savings account suit me?
Fixed-rate savings accounts require lump-sum deposits and you usually can’t add any more money during the term, so you’ll need to be sure of the amount you wish to lock away at the outset.
You’ll also need to be sure that you won’t require access to your savings for the duration of the term. If you’d prefer to be able to make withdrawals whenever you want, an instant-access savings account would be the best option.
Make sure you thoroughly research your fixed-rate options before investing your money as it’s unlikely that you’ll be able to change your mind once the account is open without incurring a penalty.
The market’s best fixed-rate savings accounts
The best one-year fixed-rate account currently available is offered by Shawbrook Bank and pays 2.15%. This account requires a minimum deposit of £5,000.
If you’re in a position to tie your money up for longer, the best interest rate currently available on any fixed-rate account is 2.90%, offered by FirstSave on its Five Year Fixed Rate Bond. This is an online-only account and requires a minimum deposit of £1,000.