Banks are increasingly reserving their best savings rates for accounts that lock your money away for years.
As a result of the much-publicised credit crunch, banks are not only desperate to attract your savings, but also to ensure you leave it with them for a very long time.
To achieve this, they are launching accounts with rates as high as 4.10% - that’s 3.60% above base – provided you don’t access your money for up to five years (see table below).
But is this necessarily the best option for you?
Long term savings accounts and their market leading rates
| Bank/Society |
Rate |
Term |
| Halifax |
4.10% |
5 years |
| ICICI |
4.10% |
2 years |
| Principality |
4.00% |
2/3 years |
| West Bromwich |
3.91% |
3 years |
The safe option can be risky
Obviously the notion of securing a fixed rate of return is attractive, especially when that rate is a market-leading one.
But locking your money away can be problematic on two fronts. First is the inability to access your money for such a long period.
In these uncertain times when unemployment is soaring along with the cost of living, there is every chance you will need to access your money in a hurry.
However, these long term accounts tend to carry extraordinarily heavy penalties for withdrawals - the Principality deal mentioned in the table above is a prime example, charging you a whopping six months’ interest. On a £10,000 balance, that works out to around £200.
Who knows where rates are going?
The second point to keep in mind is that you run the risk of falling behind the market leading accounts as time goes by.
With savings rates so volatile, it’s difficult to say how competitive yours will be in five months, let alone five years.
Remember that savings rates of over 6% were widely available less than a year ago, and while rates are almost certain to remain low in the short term, the risk of losing out increases the longer you lock your money away for.
What are your other options?
If you are nervous about locking your money away for a long period, the good news is that shorter term fixed rate accounts are almost as attractive.
The ICICI one year bond comes with an attractive rate of 3.90%, while the AA one year deal pays 3.75%.
Should you be looking for an even shorter term, Furness Building Society offers a 3.40% rate on its Homesaver account, which requires four months notice to access, while Northern Rock’s Saver Direct Tracker (3.20%) has a three month notice period.
If you are set on locking into one of the long term deals, however, be sure to keep some money aside in an access account.
That way you can access money in a hurry without losing a heavy chunk of interest in withdrawal charges.
