Why long-term savings accounts are a waste of time

Long-term savings rates are at their highest for years, but they're still not good enough.

If you look at what one, two, three and four-year savings accounts are paying, you don't get a great deal more than you get with easy-access accounts and their tax-free equivalent, the easy-access cash ISA.

One-year fixes

One-year fixes can make sense sometimes, but not so much at the moment.

Tie your money into the best one-year tax free account, Aldermore's 1 Year Fixed Rate ISA, and it'll pay you 3.31%. FirstSave will pay 3.5% on its 1 Year Fixed Rate Savings Account (issue 15) before tax is deducted.

Compare that with easy access

Yet compare those two with easy-access accounts. Santander pays a minimum 3.3% for a year on its tax-free account, the Santander Flexible ISA (issue 3). That is just a fraction less than Aldermore's one-year fixed ISA, despite the fact you can access it penalty-free immediately. Furthermore, Santander has guaranteed to increase that rate along with the base rate if the base rate goes up over the next 12 months, but not to reduce it if it falls below where it is now.

Two-year fixes

Tie your money in for two years and you can get 3.7% tax free in a Bank of Cyprus cash ISA, or 3.96% before tax in the Aldermore 2 Year Fixed Rate Savings Account.

This is just a tiny bit extra than you get with easy access, so it just isn't worth the risk of tying up your money for 24 months in these accounts:

Comparison of easy access versus 2-year fixes

Type of account	Easy access	Two year tie-in	Difference
ISAs	3.3%	3.7%	0.4 percentage points
Savings accounts	3%	3.17%	0.17 percentage points

Three-year fixes

Lock in your money for three years and you get more, but the story is similar. The Principality Building Society will pay you 4.22% in a cash ISA. Its bog-standard three-year savings account is also table-topping, paying 4.26% before tax.

For such a long time to hold your money in one place, the mark-up on easy-access prices just isn't worth it. Right now you would still be losing to inflation, for example. Meanwhile, interest rates on shorter-term accounts could potentially rise quite far long before the three years is up.

Four-year fixes

Four-year fixes pay just a fraction higher than three-year accounts, despite the extra risk that locking your money up for a further 12 months entails. Halifax and Bank of Scotland offer the Fixed Rate ISA Saver paying 4.4%, and Cheshire Building Society's 4 Year Fixed Rate Cash ISA (issue 2) pays the same. West Bromwich Building Society pays 4.31% before tax in its 4 Year Fixed Rate Savings Account.

Five-year fixes

Better seems to be the five-year fix, at least for ISAs. Birmingham Midshires pays 5% with no tax due on its 5 Year Fixed Rate ISA. Inflation averages somewhat less than 5% over the very long term, so this doesn't seem too bad.

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However, inflation is currently way above average and we could see a further massive and long-lasting spike in inflation as a delayed reaction from printing vast amounts of money, and due to the USA exporting inflation and the UK importing inflation from Chinese made goods and oil. Hence, the risks of tying up your money for 60 months still don't seem worth a couple of extra percentage points above easy access.

Looking at the best 'ordinary' five-year savings account, Birmingham Midshires wins again, paying 5.05%, but that means you still only get 4.04% or 3.03% after tax. Not a great reward for such a long tie in.

Inflation-proof your savings

My favourite long-term accounts are inflation proofed. The majority of us try to guess what will happen to interest rates and inflation, and attempt to choose the 'right' accounts, with the aim of making money from savings, but we normally lose over the long run, even if we get it right from time to time.

That's why, if you want to make money, I recommend you don't try to do it by earning savings interest. Invest in your careers, your homes or in the stock market, and you have a much better chance.

Inflation jumped to 5.5% this month. What can you do to fight back?

Yet if you merely want to preserve your savings against the ravages of inflation, that is a much more realistic goal.

I wrote about some five-year, inflation-proof accounts in The best savings accounts for the new tax year. By using those accounts you will do better than the vast majority of savers over the long run, who can't resist trying to make money from savings by making guesses. More importantly, you will soundly protect your money from losing its worth.

The accounts we all need

We all should prioritise building a substantial pot of money that we keep available for immediate access in case of emergencies. We also need money available in the near future for big annual purchases, such as Christmas presents, holidays and MOTs.

That's why everyone should have easy-access savings accounts, such as the aforementioned Santander and ING accounts.

You will frequently, but not always, lose to inflation with easy-access accounts. However, that is the price we pay for having money waiting for us for our ongoing, short-term needs, which are considerable. There is no realistic alternative; leaving money in your current account rarely pays off, and the penalties for exiting long-term deals early are just too big.

You should be able to take the edge off inflation with the best easy-access accounts, even when inflation is running high. The added advantage is your money remains flexible until special deals come along, such as the current batch of inflation-proofed accounts.

Plus, as I have demonstrated, most longer-term, fixed-rate accounts currently just don't reward us appropriately for the commitment we make.

More: Compare easy-access accounts | The best savings accounts for the new tax year | 5 gas and electricity rip-offs