Savers are currently mostly divided into two camps: the easily accessible savers who keep their money close at hand and the fixers who want to make their money work as hard as possible.
With rates not seen in more than a decade, savers are chasing fixed rates, according to popular savings website The Savings Guru.
It says savers are currently focusing on one-year or five-year fixes, with not much interest in three-year and two-year deals.
> Find the best deal using our independent savings interest tables
Good yields: In the closing months of last year, as interest rates rose, many sought the higher yields offered by fixed-income bonds
Savers may not get much interest in return for locking up their money for years. The best fix for one year currently pays 4.52 percent and the best fix for five years pays 4.65 percent.
A spokesperson for Savings Guru said: ‘In terms of whether people are fixing longer or not, we’re seeing a polarization.
“Our most popular fixed rates are currently one or five years. Savers either go for the shorter one-year term and see what rates are like 12 months from now, or they’ve decided they’ve peaked and are sticking with the five-year best rates.
“We see much less interest in two- and three-year contracts where there is only a small premium over the best one-year rates.”
But if interest rates peak, as some suggest, it could be a smart move to set aside money for several years for wealthy savers who are confident they won’t need access to their money.
Easy access rates have also increased in recent weeks, drawing more and more savers back to these deals.
Since the Bank of England raised its base rate last month, a host of savings providers have raised easy-access rates.
The best easily accessible deal now pays 3.55 percent, courtesy of the savings and investment app Chip.
> View the best low-threshold rates here
The Savings Guru spokesperson added, “While one-year fixes remain the most popular, easy-access searches have increased significantly, with an increase of almost 50 percent in the past six months.
“This is not a big surprise given that the difference between them is quite small – currently less than 1 percent.
“In addition, we felt that savers didn’t think it was worth moving easily accessible money because the returns weren’t good enough, when now they’re seeing rates of 3.5 percent or more and that’s attractive to them.”
Isa cash rates have also improved significantly, with fixed rate deals proving particularly popular among savers looking to protect the interest they earn from the taxpayer.
The best one-year Isa cash deal currently pays 4.2 percent, while the best easy-to-access Isa cash pays 3.27 percent.
> View the best cash Isa rates here
The Savings Guru said it has seen a significant increase in people seeking fixed-rate Isas, and particularly one-year fixed-rate products. The interest on these accounts has almost doubled compared to six months ago, when the inflow at Isas was already high by normal standards.
The spokesperson added, “One year old Isas were the third most popular product on the site last month and so far this month.”
Fixing last year may have paid off
In the closing months of last year, as interest rates spiked after Liz Truss’ mini-budget fiasco, many looked to the higher yields of fixed-income bonds.
The difference between low-threshold savings interest rates and fixed interest rates was greater then than now.
For example, in early November, the best fix for a year paid 4.65 percent, while the best easy access rate paid 2.4 percent.
Now the best easy access rate is 3.55 percent and the best one-year solution is 4.53 percent.
While fixed interest rates have not improved from their peak in November, savers who fixed rates last year may be glad they did, especially if inflation falls as predicted.
The Office for Budget’s responsibility now expects CPI to fall to 2.9% by the end of the year
Derek Sprawling, savings director at Paragon Bank, said: “We saw a clear trend towards fixed rate accounts in 2022, which accelerated in the last quarter of the year.
“Rates offered by savings providers rose during that period as the Bank of England’s base rate grew, while the economic volatility of that period may have seen us see a flight to safety from other asset classes as well.”
He added: “Savers may also have a long-term view of inflation. Although inflation was above 10 percent at the time these accounts were closed, it is expected to return to long-term trends by the end of this year.
“This means that savers who can secure a fixed interest rate above 3 percent or 4 percent could see the value of their money increase in real terms once inflation falls to the long-term target of 2 percent.”
Is now a good time to fix longer?
Some economists predict that interest rates will fall in the coming years, which could mean that those who opt for long-term solutions now may soon be very relieved that they did.
Analysts at the International Monetary Fund (IMF) believe that once the current inflationary period is over, interest rates in advanced economies like the UK are likely to return to pre-pandemic levels.
Last month, the OBR forecast inflation to fall to 2.9 percent by the end of the year, with the Bank of England forecasting a similar outcome.
IMF experts say the recent spike in interest rates is likely to mark a dip in a trend where interest rates in Britain and other major economies were near zero before the pandemic.
Capital Economics, an independent economic research firm, forecasts that the Bank of England will cut its base rate to 3% by the end of next year and then to 2.5% by the end of 2025.
Kevin Mountford, co-founder of Raisin UK, says: ‘I have a feeling that base rates could now remain at 4.25 per cent and, according to the recent IMF report, could start falling back in the coming months and into 2024 .
“With this in mind, we believe there is real value in long-term fixes and these would be ideal for higher net worth savers who want to take a portfolio approach, particularly where interest rates can be taken on an annual basis.”
What are the risks of a long-term fixed savings interest rate?
Regardless of the rate of return offered, savers should always have a rainy day fund in an easily accessible account for emergencies.
Once they have that, they may want to direct excess savings to fixed rates to get higher returns.
The problem with fixing is that there is no escape route, as withdrawals are generally not allowed before the end date.
Many providers simply state that withdrawal is not possible, while some make it clear that access is only granted in exceptional circumstances, such as death of the account holder or life-threatening illness.
Savers should therefore only put money in a fixed account if they certainly do not need it during the term.
Another thing to consider is that with interest rates now at levels not seen in more than a decade, there is a higher chance that savers will have to pay taxes on the interest they earn.
The personal savings deduction allows savers to earn £1,000 a year tax-free, while higher-rate taxpayers get just £500.
The best cash Isa rates only pay a little less than the best standard savings rates, which means they can make sense.
If you’re a base rate taxpayer earning 4.5 per cent interest, having £22,200 in savings will tick you over your annual allowance – and for a higher rate taxpayer that amount is £11,100.
Savings platform Raisin UK says the short-term solutions have proven to be the most popular option over the past 12 months, with about 50 percent of money ending up in accounts with terms of up to a year.
It says about 20 percent went to easily accessible accounts and a similar proportion to longer-term fixes, with the rest going to notice accounts.
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