Are long term fixed rate savings accounts really worth it?

30th May 2014

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Mindful Money’s savings expert Kara Gammell looks at the accounts on offer and questions whether they will be worth the money if economic circumstances change.

High street banks and building societies are trying their best to lure savers into locking into today’s low interest rates with accounts that tie up cash for as long as seven years.

Newcastle Building Society has become the latest to launch a seven-year fixed-rate bond paying an interest rate of 3.5%. But while the rate means this account tops the best-buy tables over the term, is handing your cash over for that length of time really worth it? How do these long-term fixed-rate deals compare to those savings accounts that allow you to have better access to your cash?

While fixed savings accounts typically mean the highest returns of interest, they also demand the biggest commitment while offering the least flexibility by not permitting withdrawals or limiting additional deposits once the account is open.

Yet industry experts warn against locking in a rate for too long due to the likelihood that the Bank of England will hike the historic low base rate sooner rather than later – pulling savings rates up as a result.

“Savers must think carefully before tying up their money for a long period of time,” says Rachel Springall, spokesman for Moneyfacts.co.uk.

“You may find that, although rates look competitive now, when interest rates start to rise, these returns no longer look quite as appealing,” she says.

But many savers feel like they have few options. Rates on savings accounts have never been lower – with many paying an abysmal 0.1%. Anyone looking for a half decent rate of interest has had little choice but to consider accounts that lock savings away for a specified period.

To add insult to injury, the interest rates currently offer for these long-term bonds are still much lower than the shorter-term deals offered just a few years ago.

For instance, according to Moneyfacts.co.uk, savers who opted for Kent Reliance Building Society’s two-year fixed-rate bond in 2012 were able to lock into a rate of 3.5%. But as the account comes to a close, they will be shocked to discover that they will be losing out on much-needed interest unless they for a term that is more than three times as long.

The reason for these falling rates is the recently withdrawn Funding for Lending Scheme (FLS) is eroding the value of savings.

The scheme, which was launched in July 2012 but was refocused earlier this year, aimed help provide cheaper loans and mortgages to both individuals and businesses. Banks and building societies have been given access to cheap money from the Bank of England on the condition that they then lend this on at competitive rates.

But while FLS has had the desired effect with mortgage and personal loan rates falling, savers are paying the price due to paltry interest rates as lenders became less reliant on attracting savers’ deposits.

So what should a saver do? When it comes to rates, should they take what they can get? Or is it worth taking a gamble and waiting for rates to rise?

Due to the expectation that the Bank of England may raise interest rates within the next two years, it would be a huge commitment for savers to lock their money away in a long term fixed account, says Ms Springall.

Industry experts agree that a sensible option is to spread savings across a short-term fixed account and an easy access account, this way savers will have access to some of their investment from one account but will still have a decent return being paid in the fixed account.

According to rate-monitoring website, SavingsChampion.co.uk, the best easy access deal is Britannia’s Select Access Saver 4, which pays 1.5%. This account requires a minimum deposit of £500 and can be operated by post, online or over the phone. Bear in mind that a maximum of four withdrawals are permitted each year or the interest rate drops to just 0.1% for the remainder of the year.

Other options include Yorkshire Building Society’s Triple Access Saver (Issue 3), Coventry Building Society’s PostSave Easy Access Issue 2 and Nationwide Building Society’s Flexclusive Saver Issue 4, all of which pay 1.4%.

When it comes to short-term fixed-rate savings bonds, existing customers at Punjab National Bank can opt for its Fixed-Deposit Account (1 Year), which pays 2%.

Savers looking for the best rate on a three-year fixed-rate bond should look to Shawbrook Building Society’s Three-Year Fixed-Rate Bind (Issue 17), which pays 2.75%.

All of the banks and building societies mentioned are covered by the government-backed Financial Services Compensation Scheme (FSCS). This means that in the unlikely event that the financial institution collapse, the scheme would refund your savings up to a maximum of £85,000 (or £170,000 for a joint account). Bear in mind that this limit is for each bank, not each individual account. In other words, if you had two accounts each containing £85,000 with one bank you would only be entitled to a total of £85,000 in compensation.

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