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15 Jun 2019

Should you lock away your cash in a 10-year fixed-term savings account?

You'll have to be able to put away at least £10,000

Leeds Building Society recently launched a 10-year fixed-term bond - the only one of its kind on the market - paying an appealing 2.53% AER.

Those who can afford the minimum deposit of £10,000 will earn at least £20.83 every month, guaranteed for the next decade. But given you won't be able to access your money until 1 August 2029, is it worth the bother?

Here, we consider the pros and cons of the 10-year account, and reveal where to find the highest fixed-term rates.

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What does the Leeds Building Society account offer?

The Leeds Building Society 10-year No Access income bond pays 2.53% AER on balances between £10,000 and £1m.

If the account balance falls below £10,000, the AER will drop to a paltry 0.05%.

If you open the account now, you can continue making deposits up until 31 July 2019. After this, you won't be able to make withdrawals until 1 August 2029, which is likely to instantly rule out many savers who can't afford to put away such a large sum for almost a decade.

Interest is paid monthly, and must be transferred to either another building society or bank account, or to another account held by Leeds. This means you won't be able to benefit from compound interest within the account.

As the minimum and maximum deposits are so high, it's likely Leeds BS is trying to appeal to those who have large savings pots and want a guaranteed monthly income. Retirees who've accumulated a lot of savings, and want a supplement to their pensions, would be the ideal market.

However, while some may be tempted to deposit up to £1m in one account and enjoy their monthly earnings, there are a few issues to address.

The maximum deposit won't protect your savings

Firstly, depositing this amount of money in one account means a large chunk of your savings won't be covered by the Financial Savings Compensation Scheme (FSCS) should the bank go bust.

The FSCS only covers up to £85,000 per person in each financial institution - so while it's unlikely that the building society will go bust, you'd be taking a risk on any balance above this amount.

If you have a large amount of savings, it would be safer to split your cash among several different accounts. Just make sure that the banks are owned by different financial institutions - for instance, savings with Halifax and Bank of Scotland would all be held under Lloyds Bank, which owns both of these brands.

You might have to pay tax on your savings interest

Given this account is aimed at savers with a lot of money to hand, there's a chance that your savings interest may exceed the personal savings allowance. This means you'll have to submit a self-assessment return and will be charged tax on your savings interest.

According to our calculations, anyone with £40,000 or more saved in this account would exceed the £1,000 personal savings allowance - the amount basic-rate taxpayers can earn tax-free. Those who pay higher-rate tax have a personal savings allowance of £500, and additional-rate taxpayers don't receive any personal savings allowance.

It's important to consider whether this added tax would outweigh the benefit of this savings interest. If your earnings mean you're on the cusp of a higher tax bracket, this added income could push you over the edge and mean you'll pay a higher rate of tax.

There's also no guarantee that the personal savings allowance will remain in place for the next 10 years. If it was scrapped when you're part-way into your 10-year fixed-term stint, there'll be nothing you can do about the added tax you'll need to pay.

Cash Isa benefits

Those with larger savings pots can often benefit from using cash Isas, as all money held within an Isa wrapper will remain tax-free - no matter how much it grows.

However, if you have a sizable amount of savings that you want to transfer, it could take a number of years to do so, due to the £20,000 annual Isa limit.

This limit is the overall amount you're permitted to pay into an Isa in each tax year. You could deposit the whole sum into a cash, stocks and shares or innovative finance Isa, or split it between several different Isa types.

So, if you have, say, £100,000 in savings accounts that you'd like to move to an Isa, you'd unfortunately have to do this over a period of five years under current rules.

Could you earn more for a shorter term?

Before rushing to lock your money away for 10 years, it's worth shopping around - you may actually be able to earn more for a shorter commitment.

While it usually follows the pattern that the longer the fixed term, the higher the rate you'll receive, it's not always the case.

The table below shows the top fixed-term savings account rates, in order of term.

Account termAccountAERMinimum initial deposit
10 yearsLeeds Building Society 10-year fixed-rate bond2.53%£10,000
7 yearsBank of London & The Middle East seven-year premier deposit account2.75% (EPR*)£1,000
5 yearsGatehouse Bank five-year fixed-term deposit2.75% (EPR*)£1,000
4 yearsBank of London & The Middle East four-year premier deposit account2.50% (EPR*)£1,000
3 yearsGatehouse Bank three-year fixed term deposit2.55% (EPR*)£1,000
2 yearsAl Rayan Bank 24-month fixed-term deposit2.42% (EPR*)£1,000
1 yearBank of London & The Middle East one-year premier deposit account2.20% (EPR*)£1,000

*Expected profit rate. Source: Which? Money Compare and Moneyfacts. Correct 13 June 2019.

The account from Leeds Building Society stands out - and not necessarily for good reasons.

Not only is its minimum initial deposit requirement 10 times higher than every other top-rate account, its AER is significantly lower than that offered by the highest-rate seven, five and even three-year fixed-term bonds.

If you have £10,000 in savings, the difference between the Leeds BS account and Gatehouse Bank's five-year option would be £22 a year, and you'll get access to your savings in half the time.

Could long-term savings beat Brexit?

While we're still waiting to see whether the UK will leave the European Union with or without a deal, many people are trying to second guess what will happen to savings rates.

The latest figures from UK Finance indicate that people held 2.4% more money in instant-access accounts in April 2019 compared to April 2018, as many are waiting to see what happens in the economy.

Some might foresee a Bank of England base rate rise, which should push up savings rates, and are biding their time to take advantage of a boost.

But, if you think rates are likely to take a tumble after Brexit, you may opt to lock in an interest rate now before things take a turn for the worse.

For now, it's impossible to be sure about what will happen to savings interest rates.

Save with a Which? Recommended Provider

Which? Recommended Providers are companies that have been rated highly by the respondents to our unique customer survey and have products that meet the high standards of our researchers.

When it comes to fixed-rate savings accounts, Leeds Building Society's five-year fixed-rate bond pays 2% AER and requires a minimum initial deposit of just £100 - which is great for those with smaller savings pots. It's highly-rated in most areas, particularly its interest rate information.

The provider's four-year income bond pays 1.87% AER, and requires the same minimum investment.

If you don't want to commit to such a long fixed-term, the Kent Reliance two-year fixed-rate bond pays 1.9% AER - and you'll need to deposit at least £1,000. The bank's customers gave it a high overall score of 72%. Kent Reliance also offers a one-year fixed-rate bond that pays 1.65% AER.

Elsewhere, you could earn 1.8% AER with Skipton Building Society's five-year fixed-rate cash Isa, which has a minimum initial deposit of £500, and scores highly for clarity of statement and customer service.

Which? Limited is an Introducer Appointed Representative of Which? Financial Services Limited, which is authorised and regulated by the Financial Conduct Authority (FRN 527029). Which? Mortgage Advisers and Which? Money Compare are trading names of Which? Financial Services Limited.