Things to consider before opening a fixed-term savings account

22o August 2023

Securing your financial future is more important than ever in today's rapidly changing economic landscape. As we navigate through a period of high inflation and rising interest rates, it's crucial to make informed decisions when it comes to managing your savings.

Fixed-term savings accounts, for example, are gaining traction among savvy savers, offering stability and growth potential even in these uncertain times.

In this blog, we delve deeper into fixed-term savings accounts. We examine the key considerations you should make before putting your savings into a fixed-term account and explore why they’re often a good choice when protecting your hard-earned money in the current economic climate.

Understanding fixed-term savings accounts

As inflation remains elevated, fixed-term savings accounts (often called fixed-rate savings accounts) are finding favour among a range of savers. These accounts provide a predetermined interest rate over a set period, allowing you to plan and budget more effectively.

These characteristics can be helpful in a number of different circumstances – whether you’re looking to save for a short- or medium-term goal (like buying a new car or building a deposit for a property purchase) or planning to set money aside to grow into a reliable pot of savings that you can turn to in retirement.

Typically, fixed-term products offer higher interest rates than an easy-access or current account. Taking advantage of those better rates, though, requires a saver to lock their money away in the account for a set period of time.

Inflation and interest rates: the bigger picture

Although inflation is now declining, it remains elevated at 6.8%, far above the Bank of England’s 2% target.

Traditional savings accounts have proven unable to keep pace with inflation over the past 18 months. And when inflation is higher than the interest being accrued on a pot of savings, your savings' value could diminish in real terms over time. Adding to the complexity, many traditional banks have been slow to pass on the benefits of higher interest rates to their loyal customers, meaning that you may have to look a little harder to lock in a good deal.

Against this backdrop, savers should be mindful that many fixed-rate providers offer higher interest rates than other accounts (like regular savings or easy-access accounts), which could provide better returns and some protection for their savings against inflation. According to Moneyfacts, the average easy-access account rate is currently 2.53%, compared to 5.27% for the average one-year fixed-rate bond.

Key considerations

While fixed-term savings accounts can be a valuable addition to your financial toolkit, there are several important factors to consider:

  • Term length: The length of the fixed term is a critical factor. It’s important to align the term with your financial goals and needs, as it’s unlikely you’ll be able to access your money during the savings term. Different providers will offer different terms on their products, but as a general rule, committing to a longer term is often rewarded with higher rates.
  • Interest payment frequency: Different accounts offer varying interest payment frequencies – some pay periodically, while others offer interest at the end of the agreed term.
  • Interest rate changes: In the current climate, interest rates are rising, and it’s likely that they will climb higher still. This means you could miss out on earning more interest elsewhere – however, interest rates are expected to peak this year, so now is a great time to secure a good deal.
  • Topping up your account: Unlike easy access and many typical savings accounts, which allow you to add more funds to your account whenever you like, many fixed-term accounts limit you to funding your account within a certain number of days. With some providers, you will have to fund your account with a single lump sum as soon as you open it, which may not be appropriate for every saver.

Grow your money with confidence

As the wider economic landscape remains uncertain, fixed-term accounts offer savers vital security and certainty over their money, not to mention a better chance at securing greater returns. If you’d like to learn more about our fixed-term accounts, you can check out the SmartSave website here.

All rates quoted are correct as at 22nd August 2023.