If you have any savings, now you have to work harder than ever to get a decent return on your money. This is because your easy-to-access savings account is likely to pay pitiful interest rates.
One option to increase your interest is to open a term savings account, but should you? And what are the pitfalls to remember?
Savings accounts: the current situation
If you don’t know the interest rate on your savings account, chances are you’re getting a terrible rate. This is because there are a number of lousy accounts out there – and a lot of them are from big vendors!
Right now, Halifax, RBS, and Santander all have easy-access accounts that earn a shameful 0.01% interest. To put that in context, £ 10,000 stashed in one of these substandard accounts will only earn £ 1 a year.
To progress in the easy-to-access savings game, you often have to move accounts, as the highest rates in the market rarely last. Yet even if you are looking for the best rates, getting something close to a “decent” return is still a challenge.
Currently, the highest interest rate on an Easy Access Savings Account, from Coventry Building Society, pays 0.65% AER variable. The second highest is that of Tesco Bank, which pays an AER variable of 0.59%. While both are better than nothing, they’re hardly worth shouting at.
However, it is now possible to increase the interest rate on your savings by avoiding easy access and opting instead for a fixed rate savings account.
Earn 2% with a Fixed Rate Savings Account
If you are looking to get the highest interest rate on your money, it is possible to earn 2% interest.
To get this rate, you will need to open an account with Recognize Bank and be happy to lock in your money for five years. If it appeals, you can earn 2% AER fixed interest on up to £ 85,000. To get the account you need to open it online and deposit a minimum of £ 1000. You have the choice of receiving your interest monthly or on an annual basis.
If locking your money for half a decade isn’t right for you, you can earn a respectable 1.75% AER through Atom Bank, which is set for three years. If you prefer a fixed term of two years, you can earn the same interest rate through Allica Bank.
Alternatively, Allica Bank also offers a one-year fixed rate savings account paying 1.4% AER interest. This is still comfortably higher than all of the easy access options.
What do you need to know about a fixed rate savings account?
Fixed rate savings accounts have two obvious advantages. First, the interest rates on these accounts are often much higher than the easy access options. Plus, unlike easy-to-access accounts, the interest rate is fixed, meaning it cannot go down during the term of the fixed term. It gives you a great degree of certainty.
However, there are drawbacks to fixed term accounts as well.
Your money is blocked
One of the most obvious downsides is that your money is blocked. To put it bluntly, this means that you will not be able to access your cash for the entire duration of the fixed term. For this reason, you should never put all of your savings in a term account, especially if you like the security of having a rainy day fund that you can easily withdraw from.
The interest rate cannot increase
With a term savings account, the interest rate cannot go up. While this may seem like an odd factor to consider in today’s ultra-low interest rate environment, if the Bank of England increases its base rate in the near future, it is likely that rates will easy access will also increase.
If that happens and your money is stuck in a fixed savings account, you will be missing out. For this reason, the longer you fix, the bigger the bet you take to keep interest rates low for years to come.
Inflation can impact the value of your savings
On a related note, anyone with a savings should understand the importance of inflation and how rising inflation can impact the value of your money. For example, if inflation soars, the money you locked in a fixed account may lose value and you won’t be able to do anything about it in the short term. To learn more about this, see our article on How to Protect Your Savings from Inflation.
Want to learn the best places to store your money? Take a look at our top rated easy access accounts and top rated term savings accounts.
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