In October 2008, the UK base rate was 5%. By March 2009, it had slumped to a historic low of 0.5% (where it remains), slicing saving rates massively.
One way to boost your rate is to 'fix' your savings. But be prepared to lock your cash away, without access to it.
Best buy fixed-rate savings
Fixed-rate savings can be a great financial choice, but read our need-to-knows first to check if they're right for you before you get yourself a deal.
Fixed-rate savings give a guaranteed rate for a set period, and the best buy fixed-rate deals are usually better than the best buy easy-access rates.
The big catch is you can't take your money out during that time, and you won't benefit if other rates rise in that period. Therefore, they're only suitable for those who are happy to lock cash away for the entire term.
Most easy-access savings accounts are variable, meaning the rate can change both with the Bank of England's base rate and at providers' whims. With these accounts, it's important to regularly monitor the interest rate and be ready to ditch and switch.
But with fixed-rate savings, the rate you get is guaranteed to be the same for the entire term you invest for. So if an account pays you 2.5% AER for three years, you know that's the rate you'll get until the account matures in three years' time.
It's important to understand the longer you fix for, the more you are RISKING that other savings rates could be rising, meaning this could become a bad choice. If interest rates were to increase rapidly, you would have lost the flexibility to ditch and switch to a new account that now pays more than your fixed-rate account does.
The table below shows the top fixed rates for terms of one to seven years. The Bank of England base rate is just 0.5% – it's unlikely to get lower, but talk is that the rate will start to rise again at the end of 2015. So it may be best to err on the side of caution and head for a shorter fix, so that if rates do rise, you won't be losing out for so long.
Is now the right time to 'fix' savings?
The Bank of England base rate, which has a massive impact on savings rates, has been at its 0.5% historic low since March 2009. While we don't know when, it will rise at some point. So if you lock in for a long period now, you could lose out if rates rise during the term of your fix.
If rates do rise in 2015 (and no one has a crystal ball so it's simply a guessing game), by fixing you would've lost the flexibility to ditch and switch to a better payer, so it's important to go into fixed-rate savings with your eyes open and know the risks.
Of course, as long as rates stay low and you pick well, you will earn more in a fixed-rate account in the meantime.
Will I ever be able to access my cash if it's in a fixed-rate account?
No. With fixed-rate savings, you lock away the cash in return for a better reward, though there are some extremely rare circumstances where you may be able to access the cash (usually in cases of terminal illness).
Think – for a second – about it from the bank’s point of view. If it knows it has your cash for three years, say, then it can lend that out for a three-year period safe in the knowledge you won’t demand it back. It has the certainty of holding your cash, and you have the certainty about the rate you get.
This certainty is the reason the rate is higher. And this is also the reason that easy-access savings tend to be poor payers in comparison.
If the interest cost of your debt is more than you'd earn on savings (after tax is deducted) you're better off paying down the debt. If you've £1,000 on a credit card at 20% it costs £200 a year, assuming a constant balance. In savings at 2%, after tax you'd earn £20 a year so you'd be £180 a year better off repaying the card instead of saving that cash. Much more info in Should I Repay Debts With Savings?, including why you don't need an emergency fund.
What about my mortgage? Should I overpay that?
Much of this depends on the rate you're paying. If you have a super-low interest rate mortgage, then it may be that you can get a higher rate on your savings than you'd save by overpaying your mortgage. But, even if this is the case, it's still worth considering paying it off faster, as interest rates won't always be low.
For people with a higher rate mortgage of 2.5% or more, then overpaying it is a no-brainer. For example, take repaying a 5% mortgage, which would cost £500 in interest each year for every £10,000 borrowed...
To earn £500 a year after tax on £10,000, a basic-rate taxpayer needs an account paying 6.25%, higher-rate 8.33% and top-rate 9.1%.
These are phenomenal, gobsmacking, unheard-of amounts that you simply can't get safely in any normal account, which shows just how profitable overpaying a mortgage can be.
But whether you can overpay your mortgage or not depends on your mortgage provider and the type of mortgage you've taken out. The vast majority of lenders allow you to overpay, though there's usually a limit to how much you can overpay. Common limits are £10,000 a year or 10% of the value of your mortgage debt each year.
A cash ISA is simply a savings account where you don't pay tax on the interest. Anyone aged 16 or over can put up to £15,000 into their cash ISA during the current tax year, with the threshold rising each April in line with inflation.
So the first place for taxpayers to put a lump sum is often in an ISA, as you're likely to earn a bigger return than a standard account as the interest is tax-free. Plus, just like normal savings accounts, you can also get fixed-rate ISAs, where you lock cash away in return for a boosted rate. See the Fixed-rate cash ISAs for full info and top rates.
Can I access my cash if it's in a fixed-rate ISA?
Unlike fixed-rate savings accounts, which rarely allow you to access cash early, fixed-rate ISAs have to allow you access to your money, although all will charge an interest penalty, often a hefty one, if you do. Find out more about how ISAs work in the Full ISA guide.
Fixed-rate savings boost returns from easy-access accounts, so often they're the natural thought if you've got cash and you don't need to access it. But, there are several different ways to 'save' that you should consider first. These include cash ISAs, high-interest bank accounts, Pensioner Bonds (if you're 65+) and paying off debts. Full info in the Savings Fountain guide.
Are you willing to switch bank accounts to get up to 5% interest?
Surprisingly, some banks’ current accounts pay a higher rate of interest than their savings accounts counterparts. But you’ll typically need to switch bank account to take advantage, and pass a credit check. For a full range of accounts, see the Best Bank Accounts guide.
I've heard about Pensioner Bonds, and I'm old enough. Are they any good?
If you're 65+, Government-backed Pensioner Bonds are available, with a 2.8% AER rate for one year and a 4% AER rate for three years, smashing standard fixed savings. Full info in the Pensioner Bonds guide.
Can you put money aside each month? Consider a regular savings account...
This is a specific product for putting £10-£500 in every month (maximum deposits vary by account). If you want to save more, combine a few. The main advantage is they tend to pay much higher rates of interest than standard deals. For more details and best buys, see the full Regular Savings Accounts guide.
With fixed-rate savings, you won't usually get paid monthly interest. So many who rely on savings interest as income don't fix savings, even though they pay higher rates. Yet there's a workaround, where you keep some cash and use that as 'interest'. If we ignore tax for ease of explanation, an example should illustrate how this works:
You've £100,000 and can get 2% in a year-long fixed-rate account and 1.5% in an easy-access account. You'd like roughly £2,000 of interest.
Put £98,000 in the fixed-rate account, and £2,000 in the easy access. Spend the £2,000 over the year and the £1,960 earned in the fixed-rate account almost makes up for it. Then you're effectively getting the higher rate and spending the interest.
This way you can grab the higher interest, but retain access to some cash.
Ten years ago, we wouldn’t have had to stress this so clearly. No bank had collapsed in 100 years, but then the credit crunch happened. After the calamities that hit Northern Rock, RBS, the Lloyds group, Bradford & Bingley, Icesave and Kaupthing, every sensible saver should ask: "Is my money safe?"
If your money's in a UK-regulated bank or building society, it's protected under the Financial Services Compensation Scheme (FSCS) for up to £85,000 per person per institution. What this means is if you have £85,000+ with one banking group (eg, with Halifax, Bank of Scotland, AA Savings or Saga), any cash saved above the limit wouldn't be protected. Full info in Are My Savings Safe?
What counts as UK-regulated?
To be UK-regulated, a savings or current account needs to be registered as a deposit taker with the UK regulator, the Financial Conduct Authority.
Many banks are foreign-owned, such as Santander, which is owned by Spain's Banco Santander. However, Santander has UK headquarters and is authorised by UK regulators, so it is covered by the Financial Services Compensation Scheme.
However, some banks that offer products in the UK are not headquartered here – and rely on another country's deposit compensation scheme. A good example of this is Triodos Bank, which sometimes offers decent rates on fixed savings. But it is headquartered in Cyprus, so you'd be reliant on the Cypriot Government's compensation scheme if Triodos went bust.
It's rare that we feature accounts from non-UK regulated banks. But if we do, we will include a warning. If you want to read more about how savings are protected, please read Are My Savings Safe?
How can I maximise safety if I have more than £85,000 to save?
The techniques to adopt depend on the amount of cash you want to save.
Over £85,000. For those with bigger savings, in the unlikely event a bank or building society goes bust, don't put more than £85,000 in any one institution. Spread it around. What this means is that you need to identify banks that are not part of the same banking group. A read of Are My Savings Safe? will tell you which banks share their FSCS protection.
Very large amounts. Those with very large savings (a house sale or inheritance, for example) may need lots of accounts. Even if you've too much to stick to the £85,000 limit for each, the general rule of not having all your eggs in one basket still works. However, if you have a joint account, you're able to protect £170,000 per institution; as there's two of you, the limit is doubled.
Under £85,000. If you've less than £85,000, there's no problem in terms of protection. Yet if you were to have to claim compensation, this takes time, during which you wouldn't have access to your cash. Thus it's still worth considering spreading money across more than one institution.
For more info, see the How to get 100% safety section of the Savings Safety guide.
Unless your combined earnings and savings interest are under the £10,000 personal allowance (it's higher for over-65s, see the Income Tax Checker), you'll pay tax on your savings interest (apart from cash ISAs and a limited number of other products).
Interest rates are usually quoted before tax, so basic-rate taxpayers need to take 20% off the rate, for higher-rate taxpayers it's 40% and for additional-rate taxpayers 45%.
Is there a way I can pay less tax on my savings interest?
Well, there are probably many illegal ways, but we're not talking about those.
But there's one completely legal way we know of. If you're in a couple, and one of you pays a lower rate of tax than the other, it's financially worth considering whose name you save in (but ONLY if you trust them). Put it in the lower rate taxpayer's name and you'll get more interest. There's nothing stopping married couples or civil partners moving money between them.
If you're not married, there's no tax on giving your partner a 'gift' – though once the money goes across, be aware it becomes their cash, not yours. The only extra issue here would be inheritance tax. If the person who gave the cash dies within seven years the surviving partner may be charged tax.
Also known as crowd-lending, peer-to-peer savings sites are industrial-scale online financial matchmakers getting borrowers and savers together. As the banking middleman is bypassed, borrowers often get slightly lower rates, while savers get improved rates, with the sites themselves profiting via a fee.
Peer-to-peer looks like saving, tastes like saving, but as there’s no safety guarantee, it smells like an investment. If it appeals to you, you're debt-free, willing to up the risk and put money away for a longer term, then the best way is to start by dipping a toe in the water rather than going the whole hog. For full information read the peer-to-peer savings guide.
If you've decided fixed-rate savings are right for you, then the table below details the top two payers for each savings term from one to seven years. We've listed minimum and maximum savings levels, how you open the account, and whether the savings institution has full or shared £85,000 FSCS protection.
WARNING! The rate on application should apply, yet banks are changing savings rates all the time. So always double-check the rate yourself before applying.
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This calculator allows you to calculate how much interest you’ll be paid over the course of your fixed rate bond.
To get the best results out of the calculator, put in the value of your lump sum in the "How much do you already have?" field. Then, put in your interest rate into the next field. Most fixed-rate accounts don't allow you to put extra cash in monthly, so enter a zero in this field. Then, select the length of your fixed rate bond in the "How far ahead do you want to look?" field. Finally, choose your tax rate.
This calculator makes a few assumptions, the main one being that your interest will compound. In some cases, for example, if you have monthly or annual income paid out to a different account, that won't be the case, so the calculation in this case will be slightly out.
What’s the top fixed-rate savings account for joint savings?
This is a commonly asked question but almost every savings account can be set up as a joint account, so actually the question should just be "what is the best fixed-rate savings account?", which this guide is set up to answer.
How does inflation affect my savings?
To really know how well your savings are doing, you have to look at them compared to the rate of inflation. Inflation is the measure of the rate at which prices increase, so if your savings don't beat inflation after tax, they're losing you money.
Ensure your savings aren't losings...
A savings account that pays less than the rate of inflation is eroding your wealth. An example using simple numbers should help...
Imagine inflation is 5%... goods and services costing £1 this year will then cost £1.05 next year
You have £1 in a savings account at 2% interest after tax... by next year it will have grown to £1.02
Therefore saving's reduced your spending power by 3p/pound... it's a 'losings', not a savings account.
Of course sometimes prices drop – as happened in 2009 – and you get negative inflation, known as deflation. This can sometimes be positive for savers.
What about when there's deflation?
Deflation is when the rate of inflation goes negative, meaning overall prices are lower than a year ago. This, or very low inflation, can actually be a boon to savers. Look at the contrast between inflation and deflation...
When inflation's high..Suppose inflation is at 5.0% and the best savings account pays 6.5% (so basic-rate taxpayers get 5.2%). Sally Saver has £10,000 in her account, enough to buy a nominal 100 shopping trolleys of food/shoes/washing machines.
Calculating over a year for ease, her savings would grow to £10,520. Yet inflation means the shopping basket has increased in price to £10,500. Thus Sally's spending power has only increased by £20; her real interest rate was just 0.2%.
When there's a deflationary period....
Deflation has set in, with the inflation rate at minus 2%, while savings rates have further slumped too, offering just 1.5% interest after tax. Here, after a year Sally's £10,000 has only grown to £10,150, yet deflation means the shopping trolleys now only cost £9,800.
This means she could buy them and have £350 left over, giving a real interest rate of roughly 3.5%. So even though her interest's plummeted, she's actually better off.
This has remarkable consequences. Far too many have a concrete savings mindset that shouts "don't spend your capital!" Yet in a deflationary environment that's too rigid; anyone living off savings interest would face huge cuts in their income, and not spending capital would actually be penalising yourself.
Personal rates of inflation do vary, yet if you're experiencing deflation, and need to spend from your savings pot, you can do so without hurting your savings pile. Take the capital out at the rate of deflation, and you're not losing anything as your purchasing power is retained.
What happens if my tax status changes during the fix?
If you fix your savings for a few years, and during those years your circumstances change – for example, you might retire – then it may be the case that your tax band changes; you may change from paying higher-rate tax to paying basic-rate tax.
If this happens, assuming you fill in a self-assessment tax form, then you no longer need to declare interest on it, in order that your savings interest be assessed at 40%. Your savings provider will continue to take tax off your interest at the basic 20% rate before it's paid to you.
If you drop from paying basic-rate tax to paying no tax at all (if your income falls under your personal allowance level), then you should ask your savings provider for an R85 form. This form allows your savings provider to pay interest to you at the gross rate, so without any tax taken off.
A friend of mine said a fixed-rate savings account is a bond. I'm confused, what does she mean?
This is a commonly used piece of financial jargon. A bond can mean many things, but in this case, it just means a fixed-rate savings account.
You'll sometimes see these fixed-rate savings accounts referred to on financial websites as fixed-rate bonds. But it's just another name for the same thing. You don't have to be worried that it's an investment, or that you could lose your money.
Although some bonds(investment bonds that is) do carry an investment risk, you won't find any of those on this page. All accounts listed above are fixed-rate savings accounts (or bonds), with a fixed rate of interest, and no risk to the capital (unless the bank goes bust, in which case, the Savings Safety rules guarantee the first £85,000 per person, per savings institution).