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Interest slashed for fixed-rate savings accounts: is now a bad time to lock up your cash?

Average rates drop by up to 0.1%

Savers are earning less for locking away their funds, with the average interest rates for longer-term bonds dropping in recent months.

Where five-year bonds were paying an average of 2.18% AER in March, this has fallen to 2.08% now, Moneyfacts data has shown. Meanwhile, four-year bonds have dropped from 2.17% to 2.07% during the same period.

More modest decreases can be seen across short-term accounts, too. Where two-year bonds paid 1.64% AER in March, the average is now just 1.59%.

Which? looks at how interest rates have changed, and reveals where to find the best home for your savings.


Have top-rate savings accounts dropped?

Looking beyond averages, the best deals on the market also show a decline over the past four months.

The table below shows the top rates across one to five-year fixed-term savings accounts in March, compared to June of this year.

Account type March 2019 June 2019
Five-year fixed-rate savings account 2.75% 2.75%
Four-year fixed-rate savings account 2.52% 2.5%
Three-year fixed-rate savings account 2.52% 2.55%
Two-year fixed-rate savings account 2.45% 2.42%
One-year fixed-rate savings account 2.32% 2.2%

Source: Which? Money Compare and Moneyfacts. Correct 28 June 2019

Top rates have decreased across almost all terms. The exception is the best-rate three-year account, which increased slightly, and the five-year fixed-term top rate, which remained the same. The most marked drop is across one-year accounts, with the top rate now paying 0.12% less than it did in March.

But these top-rate accounts mask a lot of other changes. While the best five-year fixed rate didn’t budge, there are now far fewer accounts now that offer rates approaching 2.75%.

The table below shows the rates for five of the top-rate five-year fixed-term account rates in March and June of this year.

March 2019 June 2019
2.75% 2.75%
2.75% 2.7%
2.7% 2.65%
2.6% 2.5%
2.6% 2.49%

Source: Which? Money Compare and Moneyfacts. Correct 28 June 2019

In March, all five rates were within 0.15% of the top spot, whereas in June there’s a difference of 0.26%.

What are the best fixed-term accounts now?

The table below shows the top-rate account for each fixed-term between one and five years. The links take you through to Which? Money Compare.

Account type Account AER Minimum initial deposit
Five-year fixed-rate savings account Gatehouse Bank five-year fixed-term deposit 2.75% (EPR*) £1,000
Four-year fixed-rate savings account Bank of London & The Middle East four-year premier deposit account 2.5% (EPR*) £1,000
Three-year fixed-rate savings account Gatehouse Bank three-year fixed-term deposit 2.55% (EPR*) £1,000
Two-year fixed-rate savings account Al Rayan Bank 24-month fixed-term deposit 2.42% (EPR*) £1,000
One-year fixed-rate savings account Bank of London & The Middle East one-year premier deposit account 2.2% (EPR*) £1,000

*Expected Profit Rate. Source: Which? Money Compare. Correct 28 June 2019

There are a few things to keep in mind. Firstly, all these accounts require a minimum initial deposit of at least £1,000, which is quite a large sum to commit to locking away for several years.

Secondly, all of the top-rate accounts are currently offered by Islamic banks, which pay an ‘expected profit rate’ rather than AER interest. So, the rate advertised is what the banks expect to pay, meaning it’s not guaranteed.

However, the bank will contact you if it plans to pay a lesser rate, giving you the opportunity to withdraw. And to our knowledge, this has never happened with any of these accounts.

Your savings rate should beat CPI inflation

CPI inflation measured 2% in May, down from 2.1% in April. On the face of it, a fall in inflation would usually make it easier to find a savings account to match or beat it. But that may not be the case if rates are dropping, too.

Inflation tracks the prices of around 700 popular goods and services. So, if you’d bought everything in the imaginary inflation shopping basket in May 2018, you’d need 2% more money to buy the same things again in May 2019.

The inflation figure is a good indication of how fast your savings should be growing to retain the same buying power.

Alternatives to fixed-rate savings accounts

Cash Isas

You could also consider putting your savings in a fixed-rate cash Isa.

The table below shows the top-rate accounts for fixed terms between one and five years. The links take you through to Which? Money Compare.

Account type Account AER Minimum initial deposit
Five-year fixed-rate cash Isa Metro Bank five-year fixed-rate cash Isa 2.1% £1
Four-year fixed-rate cash Isa United Trust Bank cash Isa four-year bond 2.05% £15,000
Three-year fixed-rate cash Isa Dudley Building Society three-year fixed-rate cash Isa 1.91% £100
Two-year fixed-rate cash Isa AA two-year fixed-rate cash Isa 1.8% £500
One-year fixed-rate cash Isa Al Rayan Bank 12-month fixed-term deposit cash Isa 1.6% (EPR*) £1,000

*Expected Profit Rate. Source: Which? Money Compare. Correct 28 June 2019.

While cash Isa rates don’t match up to their savings counterparts, these accounts have the added benefit of being tax-free, no matter how much interest you earn.

This is different to savings accounts, where savings interest can be taxed.

Tax on savings has become less of an issue for most savers since the introduction of the personal savings allowance in 2016. This allows basic-rate taxpayers to earn up to £1,000 in savings interest before tax, and higher-rate taxpayers to earn up to £500 tax-free.

However, those with a lot of cash to save – or who are additional-rate taxpayers – could still find themselves facing a tax bill on their savings, in which case an Isa would be a savvy choice.

High interest current account

Some current accounts, such as the Nationwide FlexDirect current account, pay 5% AER interest, and could be worth considering if you have a relatively small amount of cash you want to save.

We recently explained how to play the ‘current account game’, which could see you making the most of several high interest current accounts that all require a minimum monthly deposit.

Instant access accounts

Competition is heating up across instant-access accounts at the moment, as both instant-access savings accounts and cash Isas pay a top rate of 1.5% AER.

While this doesn’t beat the rate of inflation, this kind of account gives you more flexibility to access your cash when you want it (though some accounts do have restrictive terms).

You can search through hundreds of savings accounts with Which? Money Compare.

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