Spotlight on... Fixed term savings

Whether you have a few pennies or a few thousand pounds to squirrel away, you've probably encountered the two main types of savings account: variable and fixed rate.

Most savings are variable, meaning that they may move with the rise and fall of the Bank of England base rate, or as the provider changes their stance in the marketplace.

By contrast, fixed term savings could mean that you don't have to keep a constant eye on interest rates, giving you a guaranteed rate for a fixed period of time. However, you can't take your money out during that time.

We take a look at the balance between better rates, no access and the risk of changing rates to come...

Why choose a fixed rate?

If you’re looking for a better interest rate on your savings, and you're able to lock your money away for a fixed period of time, fixed rate bonds may be worth a thought.

A fixed rate bond is a savings product which provides a guaranteed return over a fixed term, at a fixed interest rate. The term of a fixed rate bond is usually between 1 and 5 years, during which access to your money is limited. The reward for committing your money for a longer period is a typically higher rate of interest than you might otherwise get with an instant access savings account.

On the whole, the longer you're prepared to lock your money away, the higher the interest rate will be. However, you should be aware that, once deposited, you may not be able to withdraw from your agreement. Even if you are able to pull out of the fixed term early, you might incur financial penalties. If you think you might need to dip into your savings within the term of the account, or you don't have a contingency fund or other savings stashed in an instant access account, think twice before putting your money in a fixed rate bond.

What's the difference between fixed term savings and fixed rate bonds?

Perhaps confusingly, the terms are used interchangeably to talk about long-term fixed rate savings products. They're essentially the same thing: savings products which involve a longer-term commitment, which may mean no access for the duration of the fixed term, and a fixed rate of interest which is often higher than variable and instant access savings accounts.

Is longer better?

If you're able to leave your savings alone for a longer period, there is some debate over whether opting for a longer fixed term (and therefore a higher rate) is a good choice in the current climate. Bank of England boss Mark Carney previously said that, should unemployment drop below 7% the 0.5% Bank of England rate could stand to rise. However, as of January 2014 when unemployment numbers dropped, he said that this alone was not a trigger for raising the BoE rate.

So, while there's no financial crystal ball to predict a rise in the Bank of England base rate within the next couple of years, it remains within the realms of possibility. If you had chosen a fixed term product over a longer term, say five years, you would potentially be worse off if the rates rose in that time, and be unable to switch to a better rate.