The best short-term savings rates: should you lock your cash away for three months?

Short-term savings accounts received a boost this week, as Monzo Bank increased interest rates on its short-term savings accounts and introduced a new three-month option.

Savers with the Monzo Bank-OakNorth three-month fixed-term account can now earn the equivalent of 1.35% AER. Meanwhile Monzo's other savings account rates have increased by up to 0.1%.

But these aren't the only choices for savers reluctant to commit their cash for more than a year.

According to Moneyfacts, there are currently 142 short-term fixed-rate savings accounts on the market, with terms ranging from just three months up to 12 months.

Which? reveals which short-term accounts offer the highest rates, and how they compare to other ways to save.

How much interest can you earn from short-term fixed accounts?

The table below shows the top fixed-rate accounts with terms of 12 months or less, ranked by how long your money is locked away.

_{*Expected Profit Rate. Source: Which? Money Compare and Moneyfacts. Correct 23 July 2019.}

Generally, the longer the fixed term, the higher the rate you'll receive. Bank of London & The Middle East's six-month bond bucks this trend by offering a rate higher than the highest nine-month account, enabling your savings to grow faster in a shorter space of time.

As is often the case, it can be difficult for those with less than £1,000 to get the top rates - however, the top nine-month and three-month bonds only require an initial deposit of £1 and £500 respectively.

With a rate of 1.35%, Monzo's new three-month bond is table-topping - and it's only available through Monzo's savings pots in the app. This could be great news for savers looking for a convenient short-term option.

But despite increased rates, Monzo's existing accounts aren't the best. In fact, you could get a better rate by going directly to its partner OakNorth. The new rates for Monzo's existing fixed-term accounts are:

• six-month fixed-term account: 1.46% AER
• nine-month fixed-term account: 1.51% AER
• 12-month fixed-term account: 1.63% AER

Should I get a short-term savings account?

Before opting for a new home for your savings, consider the pros and cons of these accounts. In some cases, you may be better off not opting for a fixed-term at all.

Pros of short-term fixes

• You'll be less likely to spend your savings: removing the ability to access your account - even for a short time - removes the temptation of dipping into your savings. That's unlike an instant access account, for instance, where you need to exercise some spending self control.
• There's minimal commitment: the prospect of saying goodbye to your cash for five years can seem pretty daunting, whereas a year or less can be more palatable.
• You're free to jump to the best deals: if rates increase, you'll be free to bag a top deal, which you couldn't do if you had locked your savings away for years. Conversely, if rates drop you could find yourself in a worse position than if you had locked in to a steady rate.

Cons of short-term fixes

• The interest rate may not be as high as advertised: The interest rate on the account - the AER - reflects the amount you would earn over a whole year, not over the account's term. For example, if you put your money in a three-month fix account with an AER of 1.35%, you would earn just a quarter of that interest during those three months.
• You could earn more interest in some instant-access accounts: the top-rate instant-access savings accounts currently pay 1.5% AER (though only for the first 12 months, as both have a bonus rate). This beats the top-rate three-month fixed account, while also offering the flexibility to make withdrawals.
• Most short-term fixed accounts don't beat rate of inflation:CPI inflation measured 2.00% in June 2019, so any account with a rate below this would mean your money loses value in real terms.
• You'll have to move money more frequently: even the savviest of savers may find it hard to remember to move their savings around every three months; a longer-term account reduces this hassle.

You'll need to weigh up each of these factors to decide what kind of account is likely to work best for your circumstances.

Find out more:how to find the best savings account

Other ways to save money for a year or less

You don't necessarily have to lock up your money at all to help it grow. Here are a couple of options:

Cash Isas

There aren't currently any cash Isas with a term of less than a year, but the top one-year fixed-rate accounts are:

• Shawbrook Bank one-year fixed-rate cash Isa: pays 1.62% AER and requires an initial deposit of £1,000.
• Cynergy Bank one-year fixed-rate cash Isa: you can earn 1.61% AER when you pay in at least £500.
• OakNorth 12-month fixed-rate cash Isa: this offers 1.61% AER on a minimum initial deposit of £1,000.

While these rates are lower than savings accounts, they have the added benefit of being tax-free.

Interest earned from cash in a savings account may be taxable if it exceeds the personal savings allowance. This varies depending on your income tax bracket - basic-rate taxpayers have a £1,000 personal savings allowance, while higher-rate taxpayers have £500, and additional-rate taxpayers don't receive any.

So, if you earn a high income, or hold a large savings pot that generates a lot of interest, using an Isa will mean you won't pay tax on your savings income.

Find out more:personal savings allowance and tax on savings interest

Notice accounts

Notice accounts sit somewhere between instant-access and fixed-term accounts. You can usually make unlimited withdrawals, but there's a catch - you have to give your provider a certain amount of notice before you'll receive the money.

The notice period will be specified when you open the account, but are most commonly 30 days, 60 days and 90 days - though other terms are available. Generally, accounts with longer notice periods have a higher rate of interest.

The top-rate notice accounts for 30, 60 and 90-day periods are:

• Secure Trust Bank 30-day notice account: paying 1.55% AER, you'll need a minimum initial deposit of £1,000.
• Secure Trust Bank 60-day notice account: this pays 1.75% AER, also requires a £1,000 deposit.
• OakNorth 90-day notice account: offers 1.77% AER, also requires a £1,000 deposit.

Regular saver accounts

If you have a smaller savings pot, a regular savings account can be a good bet.

You'll need to save a certain amount each month and depositing less than this, or withdrawing any money, could mean you lose out on the interest you've earned, so read the terms and conditions carefully.

The top regular savings accounts are:

• First Direct regular saver account: paying 5% AER, you need to hold a First Direct current account to apply. You can pay in between £25-£300 a month for 12 months. If you make any withdrawals during this time, the AER falls to 0.15% AER.
• M&S Bank regular saver account: pays 5% AER. You must hold an M&S Bank current account, and can deposit £25-£250 a month for 12 months. If you close the account before one year, you'll receive the Everyday Savings Account variable rate, which is currently 0.2% AER.
• HSBC regular saver account (preferential rate): just for HSBC Premier or HSBC Advance customers, you can pay in £25-£250 a month, and you'll receive 5% AER. If you close your account before the 12-month term, the AER will drop to 0.2% AER.

_{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.}