R
ising interest rates present an opportunity for savers to earn the best returns in years, with some deals offering over 6% interest. According to Anna Bowes, co-founder of Savings Champion, fixed-rate deals are currently more competitive than ever before.
“There is a group of providers constantly surpassing each other in the best-buy tables, resulting in incremental increases in interest rates,” she explains. “For instance, there was an account that launched and seemed great, but was pushed out of the top five within an hour.”
However, there are factors to consider for individuals looking to save money. Is it wise to commit to a fixed-rate account during a time of rising interest rates? And are these deals truly advantageous when accounting for inflation?
Fixed rates
Currently, the best-buy savings accounts are those that require customers to lock their money away, and these are typically offered by small challenger banks rather than well-known high-street names.
Generally, the longer the commitment period, the higher the returns. However, the difference in rates is currently minimal. According to Savings Champion, as of Friday the best one-year rate was 6% from Charter Savings Bank, and the two-year rate was 6.1%. Both accounts require a minimum deposit of £5,000.
Nevertheless, it is still possible to earn nearly as much interest with a smaller deposit. For example, Tandem Bank offers 5.85% interest on balances as low as £1.
Given the rapidly changing landscape, there is a risk that by committing to a fixed-term deal, savers might miss out on higher rates in the following week.
In the earlier part of the year, a three-year account with a 4% interest rate seemed reasonable, but now it may seem less appealing. One solution is to open multiple accounts instead of investing all the money in one, provided the minimum deposit requirements are met. For instance, instead of depositing £3,000 into one account now, one could allocate £1,000 this week and wait to see what better offers arise next week.
While this approach may be cumbersome, there are third-party services such as Raisin UK that allow for a one-time deposit before spreading the money across multiple providers.
However, Bowes warns that such services do not cover the entire market. Currently, Raisin’s best one-year fixed-rate pays 5.72%. “If you want to maximize your savings, you will need to go directly to providers,” she advises.
Another strategy to mitigate the risk of missing out on better rates is to invest in a combination of one-year, three-year, and five-year accounts. Bowes suggests that if rates increase in the following year, one can move the one-year money to the higher interest account. On the other hand, if rates decrease, the three-year and five-year accounts will still provide stable returns.
Unfortunately, no one can predict when interest rates will peak or at what level. Therefore, there is always a level of uncertainty associated with any fixed-rate account. Generally, account holders are unable to withdraw their funds until the end of the term, so it is essential to ensure the money will not be needed before committing.
Bowes reminds savers that instead of regretting their decision, they should consider the fact that they are obtaining higher rates compared to recent years. “Someone who invested in a one-year bond a year ago would have received a 2.6% interest rate, whereas now it is more than twice that,” she states.
Easy access
Rates on easy-access accounts have also seen an increase, making it potentially worthwhile for savers to move their money to a different provider even if they prefer immediate access to their funds. According to Rachel Springall, finance expert at Moneyfacts, savers can now secure an easy-access rate of around 4% gross, which is more than double what was available a year ago. However, she advises consumers to carefully review the terms and conditions, as some accounts have withdrawal restrictions.
Data from Moneyfacts indicates that last Wednesday, several providers offered over 4% interest on easy-access accounts, including Newcastle and Principality building societies, as well as Chip and UBL UK. Some providers offered rates that included a bonus, but surprisingly these were lower than the other top offers.
Newcastle’s account, for example, pays 4.3% interest and guarantees that the rate will not fall more than 0.7 percentage points below the Bank of England base rate until December 31, 2025. Furthermore, there are no limits on deposits or withdrawals.
Inflation
Although savings rates are currently at their highest level in 15 years, inflation remains stubbornly high, meaning even the best deals do not outperform it. In 2008, inflation was around 4%, while this year it has consistently been at least double that figure, resulting in a decline in the real value of deposits.
Nevertheless, Springall emphasizes the importance of savers making every effort to secure a better deal, despite the high inflation. She advises acting quickly to take advantage of the top rates available.
Bowes highlights that if inflation reaches its 2% target in the next couple of years, an account with a 6% interest rate will appear much more attractive.
Beware the not-so-great offers
Some accounts do not offer competitive rates:
Anyone with TSB’s Save Well Limited Access account can earn 2.95% interest if they do not make any withdrawals, but this drops to 0.24% in months when withdrawals are made.
FCMB Bank, available through the online savings platform Raisin UK, offers 2.1% interest for a one-year and 18-month bond. The bank’s two-year bond rate is also lower than what other providers offer, at 2.15%.
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