Should I fix or should I track?

Author: Anna Bowes | Co-Founder –  Savings Champion

Fixed Rate Bonds are always popular – there’s something very settling about knowing how much income you are going to get and when, especially when the bonds on offer are paying a far more significant return than they were in the past. At the time of writing, the average rate of a 1-year fixed rate bond is 2.69%* – up from just 0.62% a year ago. That is more than 4 times higher!

What is a fixed rate bond?
As the name suggests, a fixed rate bond pays a fixed interest rate for the term of the bond – so you know how much you will earn over the duration. A key thing to be aware of is that once you have put your money into a fixed rate bond, usually, there is no access at all until it matures, except on death when the estate will be able to access the money as required. In the simplest terms, as a result of this lack of access, banks and building societies will often pay higher interest rates than they do on more accessible accounts, as they know that they have a predictable pot of money that they can lend against.

What are the pros and cons of a fixed rate bond?
Well, we already mentioned that there is no access, so it is important to make sure that you are happy to commit the cash you are depositing for the full term.

Next, the fact that the rate of interest is fixed for the term can be viewed as a pro or a con, depending on what happens to savings rates once your money is locked away. If other savings rates rise, you may feel annoyed that you locked in – but if interest rates fall elsewhere, you’ll be protected from that downside, so will feel pretty pleased with yourself.

But even if the rates on offer do rise after you’ve locked in your cash, remember that at least you have made a move to start to earn more interest. Those who are always waiting for something better to come along are missing out on earning more interest while they wait.

What else is available?
If you are worried that interest rates are still heading up, a variable rate account may be something to consider.

Variable rate accounts tend to fall into two types– easy access accounts and notice accounts. The former allow you to take some or all of your money when you like, the latter require you to give a set notice period before you can take your money out. And, of course, because they are variable rate accounts, the rate of interest can be changed at any time – up or down.

The problem is that with the majority of variable rate accounts, it can be a bit hit and miss as to whether any Bank of England base rate increases are passed on in full – or even in part. So, there is another option – a tracker account.

How do tracker savings accounts differ?
Tracker accounts normally pass on any changes in base rate, up or down, soon after the Bank of England makes its announcements. However, as with most savings accounts, the devil is in the detail, and tracker accounts are no different. Some accounts truly track the base rate, so you can be sure you will always be earning what the Bank of England base rate pays – or sometimes even more. But others are more loosely linked to the base rate – so could be guaranteed to pay no less than 1% under base rate, for example. Others track other provider’s savings rates rather than the base rate – so you would be tracking the market rather than the Bank of England directly.

What should I choose?
This is the tricky bit, as it depends on your own situation, any existing accounts or investments you have, and what you believe will happen to interest rates in the future.

If you believe that the base rate, and therefore savings rates, are going to continue to rise above the levels that you can earn on a fixed rate, you may want to consider a tracker account or another variable rate account. But if you believe that rates will start to fall – or have at least peaked – you may wish to take advantage of a higher paying fixed rate bond.

If you are simply not sure, you could do a bit of both. Perhaps open a fixed rate bond with some of your cash, to take advantage of the higher rates currently available and leave some in a tracker or other variable rate account, to take advantage of any further rate rises.

One thing for sure is that you should do something, especially if you are one of the many with cash languishing in your current account – or a poor paying savings account. According to Bank of England statistics there is £267 billion** sitting in accounts earning no interest at all! Making sure you keep your cash in competitive savings accounts will help to mitigate the damaging and eroding effect of inflation – and simply put more pounds in your pockets.

*  Rate correct as at 24 Oct 2022

** Bank of England figures for August 2022 (Bank Stats Tab6.1 – Household sector Non-interest bearing deposits)

Find out more about our Tracker accounts for individuals, and our Tracker accounts for Businesses or Charities.

Although this email and article may contain helpful information and tips, these are not personal advice. You may wish to seek advice from a financial advisor if you are unsure what’s best for your own personal circumstances.

You can find out more about Savings Champion here

About Anna Bowes

Anna is a regular contributor to the BBC’s Money Box, Breakfast and News programs, as well as the national press, providing expert analysis and commentary on the UK savings market. Anna has worked in the financial services industry for more than 30 years and for most of that time has been helping people to make the most of their savings.