Serious savers urged to act now to avoid losing out on future interest rate rises

News - Banking

Written by Ray Clancy

Wednesday, 05 May 2010 08:18

Notice accounts provide a good option for savers expecting rate rises in the coming months as the best can top one year fixed rate bonds, it is claimed.

With the prospect of a base rate rise in the next 12 months looming in the UK, serious savers can ensure they get a good return without missing out on any rate increase around the corner, according to an analysis from moneysupermarket.com.

It shows that, whilst longer term fixed rate bonds offer the highest interest on your cash now, those anticipating a rise in rates over the next 12 months need not lock their money away, with the top paying notice account offering the same rate as the best one year fixed rate bond at 3.25%.

‘Making the most of your money is ultimately a long term game. The best rate today might not be the best rate tomorrow. Unfortunately for savers, in return for offering top rate deals, banks will lock your cash away in their coffers for a certain period meaning it is virtually impossible to have the best rate all the time. Much of the time, savers are left to take an educated guess as to what might be the best way to generate returns on their capital,’ explained head of banking Kevin Mountford.

‘If you lock your money away for a few years now and rates and inflation suddenly go through the roof you might find that you’ve lost out on a fair chunk of potential interest. However, leave your savings in lower paying easy access accounts and you’re guaranteed to always be a couple of percentage points behind the fixed rate bond of the day,’ he said.

‘Savers also need to keep in mind, even if rates do up whilst their money is locked away in a fixed rate product, they may have accrued sufficient extra interest in the interim to justify their move. Notice accounts offer a third way in between fixed rate bonds and easy access accounts,’ he added.

Mountford explained that they allow you to earn higher rates of interest than an easy access account, whilst also giving you the option of withdrawing your money if rates really take off or if you need the money for another reason. ‘Notice accounts tend to allow a fixed number of withdrawals per year, each of which requires between 30 and 120 days notice. Withdrawals made without sufficient notice will result in lost interest so savers need to be disciplined,’ he said.

‘With many people expecting a rise in interest rates, locking money away for up to five years may not be a particularly attractive option, but neither are easy access account paying well under 3% interest. Notice accounts offer a higher rate of interest than easy access accounts, whilst also giving the saver the option to move if more attractive rates become available,’ he added.

But people are reluctant to change. According to financial research firm Defaqto only 6% of adults change their current account each year and many have a concern that the switchover will mess up direct debits or go awry in some other way.

‘Consumers should look at their current account and see if they can get a better deal elsewhere. There are some generous introductory deals available which include high credit interest rates, 0% introductory overdraft rates and even a £100 cash gift,’ said its banking specialist David Black.

‘Don’t be afraid of the switching process because it is actually relatively seamless. The banks will do most of the legwork by arranging the notification of the change of account details with all the direct debits and standing order originators. The entire switching process will typically take between two and four weeks,’ he added.