To Fix Or Not To Fix?

Written by Karen Bryan

That old chestnut of to fix or not to fix an interest rate on your savings is back on the cards for me. I have a couple of fixed rate savings accounts maturing soon.

At present, I can earn 1.5% on up to £20,000 in the instant access Santander 123 Current Account.

If I put the money into a one year fixed rate account, I can earn around 1.9%. that’s an additional 0.4% annually. I don’t expect that interest rates paid on savings will increase by more than 0.25% in the next twelve months.

But even a 0.25% increase in interest rates would reduce the differential between the Santander current account (assuming that rate increased by 0.25%) and a one year fixed rate account to a measly 0.15%. That doesn’t seem like a very attractive proposition for tying up the cash for one year.

If I opt for a two year fixed rate account, the interest rate on offer is around 2.15%.  Trying to predict what rates will be paid on variable rate savings accounts over the next two years is tricky.

Over the last few years. I have kept making the mistake of thinking that the interest rates paid on savings would increase in the near future and have held back from opting for longer term fixed rate accounts. That was a mistake. For example, I should have opened the Leeds Building Society Five Year Fixed Rate Bond paying 3.05% in September 2013.

However, if I now go for longer term fixed rate accounts, who is to say that interest rates won’t increase soon and I’ll have made a bad decision again?

Then I think that even if I earn around 2% on my savings. that’s still well below the current rate of UK inflation of 2.3% (as measured by CPI). This means that my savings are losing their spending power.

I either take that loss in spending power on the chin (in the hope that inflation doesn’t increase too much), or go for more risky investments such as peer-to-peer lending or stocks and shares.