Nationwide has launched a new fixed-rate cash Isa paying 2% – but you have to be willing to lock your money away for five years.
The buildings society’s offerings come at a time when people are flocking away from cash Isa products.
In the 2015-16 tax year, 12.4m adult Isas were subscribed to, but this plummeted to 11.1m in the 2016-17 tax year – a massive drop of 1.6m.
Cash Isas also experienced their poorest performance last year with the average return for 2017 reaching a measly 0.93%, according to Moneyfacts.
Nationwide’s offerings may be appealing at a time of low returns, but as the base rate is forecast to rise again this year, could locking away your money jeopardise your savings?
Best five-year fixed-rate cash Isas
While the average cash Isa rate has improved from 0.93% last year to 1.09% this year, it remains lacklustre compared with the 1.42% seen in 2016.
Nationwide’s five-year fixed-rate Isa is among the products currently offering the highest returns.
Its rates are 0.21% lower than United Bank, which pays 2.21%, 0.11% lower than Chartered Savings Bank (2.11%) and equal to Virgin Money (2%).
- Find out more: compare fixed-rate Isas with Which? Money Compare
How does the base rate affect savings?
While the base rate represents the rate at which the Bank of England (BoE) lends to commercial banks, it also influences the rates that high street banks offer borrowers and savers.
Last November the BoE increased the base rate for the first time in a decade, from 0.25% to 0.5%.
The rise came as the BoE attempted to dampen the impact of CPI inflation – which measures the cost of everyday essentials – on the economy.
Unless your bank account keeps up with the rate of inflation, which currently stands at 3%, your savings will lose value in real terms.
- Find out more: how to find the best bank account
Will the base rate increase again?
It’s difficult to predict exactly how the base rate will behave, but signals seem to suggest that an increase can be expected around May this year.
Although no changes were made to the base rate by the BoE earlier this month, it said that rates will likely rise faster than previously expected due to the strong economy and inflation.
Gertjan Vileghe, a member of the monetary committee that sets the base rate, said last week that the economy was ‘ready for somewhat higher interest rates’ due to a pick-up in wages and a rapid rise in consumer debt.
According to the Quarterly Inflation Report published on 8 February 2017, the next base rate rise is forecast to happen in autumn or winter this year, but some economists have said that a rise of 0.25% could come much earlier.
A recent Reuters poll showed that 32 out of 57 economists expected the base rate to rise in May.
- Find out more: what are the different types of bank account?
Should you lock away your savings?
Locking away your savings in a fixed-rate account does guarantee you a certain level of return, which can be reassuring.
But it’s important to consider the impact of a rise in interest rates, and also whether a fixed-rate account could jeopardise your ability to get more competitive returns in the long term.
Another factor to bear in mind is that even if the base rate does rise as expected, the banks may not pass on the increase to savers.
- Find out more: how to keep your savings safe
Getting a better return on your money
Exploring other savings products such as stocks and shares Isas could help you boost your returns.
According to Moneyfacts, stocks and shares Isas earned 11.75% returns in 2017, while cash Isas only earned 0.93%.