Fixed rate savings 📍
If you’re considering the idea of starting a savings account, you're likely aware of the abundance of choices available, and navigating through them to find the right type for you can be overwhelming. That's why we've developed these articles to assist you in making informed decisions. In this particular article, we'll be delving into the world of fixed rate savings accounts.
What is a fixed rate savings account?
A fixed rate savings account, also sometimes called a fixed rate bond, is a type of savings account where you lock away a set amount of money for a set amount of time, for a set, fixed, interest rate. These types of accounts let you earn a predetermined amount of interest on your savings, that will remain the same regardless of what happens to interest rates, so you’ll know exactly how much you’ll earn. Fixed rate accounts typically pay higher interest than easy access accounts, however, do not offer the same level of flexibility or access to your money. If you do need to access your money before the term ends, you will likely incur some kind of fee. The amount of time the money is locked away is set by the provider and is usually between 6 months and 5 years. Although they can be longer. This will depend on the fixed rate savings account and provider you choose.
What interest do they pay?
Fixed rate savings accounts have fixed rate interest rates, unlike easy access savings accounts which are usually variable. This means that the rate on your account will not change over time, regardless of the interest rate environment. This is a positive characteristic if interest rates later fall, but a potential consideration to bear in mind if markets expect interest rates to rise. The exact amount of interest you earn will largely depend on the terms of the account you choose and your provider of choice. Of course, the more money you deposit when you open an account, the more interest you’ll receive on your savings at the end of the term. Moreover, interest rates offered by providers are sometimes banded, meaning the more you have to save, the better fixed term rate they’ll offer.
Why do people save?
Aside from having a nest egg for later life, saving for an expected life event, like buying a house, or setting aside an emergency fund in case the boiler breaks down, people save to earn interest. Most easy access accounts pay interest yearly, although you may be able to choose to have it paid monthly. This interest can then be useful for people who either want to use the interest to top up their income or build up their savings pot further, through the power of compounding.
What is compounding?
Compound interest, or compounding is the interest earned on both the original saving and the accumulated interest. In the context of saving, compounding is achieved by reinvesting interest earnings to increase your overall savings pot and enable further returns over time. For instance, if you save £1000 with a 6% annual return, the £60 earned in the first year is added to your savings pot, resulting in a larger pot of £1060. The subsequent interest is then calculated on this new amount, fostering a compounding effect. By continuously reinvesting interest, the savings grow exponentially. In a five-year scenario, the initial £1000 grows to £1338.23, with £338.23 attributed to compounded interest alone. This compounding gains momentum over time as more earnings are reinvested, illustrating the power of allowing savings to generate returns over time. Of course, this is just a worked example to show compounding in action. Real interest rates may change over time.
Advantages of fixed rate accounts
Fixed rate savings accounts offer several potential advantages for savers. One key benefit is of course the stability of the interest rate, as it remains fixed for a predetermined period, protecting your savings from any fluctuations in market rates. This predictability allows for better financial planning, especially if you have a savings goal in mind, and ensures a consistent, guaranteed return on your savings. Additionally, fixed rate accounts often provide higher interest rates compared to their variable counterparts, presenting an opportunity for increased earnings comparatively, although this should be considered with decreased access flexibility. The structured nature of these accounts encourages disciplined saving, as money is locked in for a specific term, discouraging impulsive withdrawals which may be tempting with an easy access account. Finally, fixed rate savings accounts are appealing and suitable for individuals seeking a low-risk option to grow their money, with a guaranteed return, unlikely with investing in stocks, making them an attractive choice for those prioritising financial security and steady growth over time.
Disadvantages of fixed rate accounts
Despite their advantages, fixed rate savings accounts also come with certain disadvantages to bear in mind. One notable drawback is the lack of flexibility, as your funds are committed for a predetermined period, and early withdrawals may incur financial penalties, loss of interest, or both. This restriction can be a disadvantage for individuals who may need access to their savings in the short term. This factor makes fixed rate accounts for short-term savings, or emergency fund building, where easy access savings accounts may be more appropriate. Additionally, if market interest rates rise during the fixed term, you miss out on potentially higher returns, as your rate remains unchanged. Moreover, fixed rate savings accounts often require a minimum deposit that can be comparatively high to some other account types, of £100 to £1000, perhaps more, to open an account. Finally, you will not be able to regularly add savings over time to your account during the term of the fixed rate, so this account is more suitable to savers already with a fixed sum they’d like to put away.
How to choose the best provider
If you’re getting close to deciding on whether or not this type of savings account is for you, and you’ve had a look at some options on our fixed rate savings account comparison table, be sure to consider these factors before going ahead with a provider.
Rates differ among providers, so be sure to compare them against one another and verify whether the rate includes a temporary new customer bonus rate, which may decrease after a few months.
Examine if there are any limitations, or costs associated with accessing your savings in the event of an emergency. Certain accounts may impose severe restrictions and may even impose heavy penalty charges if you access your money before the term is up.
Consider how you want to manage the account, whether it's through an app, a web platform, or even in person, in a bank branch. Also bear in mind, how this relates to how you can get customer support if you have a question, or if something goes wrong.
Is now a good time to save?
Following years of historically low interest rates, there's a welcome shift as banks are now providing more attractive rates for savers, driven by the steady increase in the base rate by the Bank of England since early 2022, as a result of rising inflation rates. Although most savings products have higher rates, making it a comparatively better time to save than even a few years ago, it's crucial to consider potential shifts in interest rates. If there's a likelihood of the Bank of England rising rates in the near term, opting for a fixed account might be less of a desirable savings choice, however at the time of writing there seems to be little market expectation of this change in the immediate future. Fixed rate savings accounts however presently offer the highest rates since the 2008 financial crash, providing a guaranteed source of returns on your money. Given the market volatility in global stock markets as of late, fixed rate savings accounts have emerged as a pragmatic alternative for individuals looking to grow their money in a low-risk way.
Is a fixed rate savings account for me?
It’s usually a pretty good idea to have some form of savings in place, and If you're keen to start saving gradually, an easy access savings account may be a better place to start. However, if you have longer term savings goals in mind, don’t want the temptation of accessing the money at will, and are comfortable locking away your money, you might benefit from the higher interest rate provided by fixed-rate savings accounts. Whichever savings account you choose, an undeniable appeal to bear in mind is the low-risk nature of savings, particularly when compared to investing. With savings, you will not end up with less than you initially deposited.