How To Fix Your Savings

You can earn top rates of interest in a savings account with a fixed interest rate. We reveal the Best Buys and their no-strings rivals.

Here's a question for you: is it better to fix the interest rate on your savings or find the best rate on offer from easy-access accounts?

Naturally, the answer depends on your attitude to risk, your expectations of future interest rates and your intentions for your savings pot. For example, if you rely on your savings to supplement your income, perhaps because you're retired, then the security of a fixed rate of interest may be a vital piece in your financial jigsaw.

On the other hand, if you're simply aiming to earn a high rate of interest on your nest egg and you expect interest rates to rise over time, then you might choose to take a gamble and go for a variable rate which may go up. Note that your emergency fund (to cover life's little mishaps, usually three to twelve months' salary) should always be in a top easy-access account, because you must be able to dip into it at short notice.

Lastly, it's important to weigh up the best rates on offer from fixed- and variable-rate savings accounts, as the larger the gap, the more compelling one category or the other becomes. Let's take a look at the best fixed-rate savings accounts on offer at present, courtesy of independent financial researcher Moneyfacts (which powers the Fool's search wizards for savings accounts, credit cards, personal loans and so on):

Best Buy fixed-rate savings accounts

Source: Moneyfacts, 30/08/06

As you can see, it's possible to earn a fixed annual interest rate of as much as 5.65% before tax if you're prepared to tie up your money for five years. Alternatively, you can earn a fixed 5.5% by opting for a one-year bond with the Bank of Cyprus UK, which means sacrificing 0.15% a year in return for much earlier access to your money.

Personally, as someone who likes to be able to react quickly to changing financial circumstances, I'm not a fan of fixed-rate accounts. Furthermore, I need to be able to get at my nest egg quickly if, say, a share I like the look of falls in price and becomes a better bargain. Indeed, during the market turmoil of the last three months, I withdrew cash in order to buy into the market falls.

Hence, I prefer to keep my spare cash in a table-topping easy-access account. For the record, the highest-paying accounts with no strings attached are the ICICI Bank HiSAVE account (5.15% AER before tax on £1+) and the Yorkshire BS Instant Saver (5.10% AER on £1+, guaranteed to be no less than the Bank of England's base rate until 28/02/07).

Finally, if you need instant access to your money and can't wait the three days it takes to transfer money via the banking system, then the Post Office Instant Saver account might be right up your street. It pays 5% a year before tax on £500+, including an introductory bonus of 1% for a year. This account guarantees to match any increases in the base rate to 01/01/08, after which the rate will never be less than 1% below the base rate. You may make six free withdrawals per year, with subsequent withdrawals costing £1 each.

You now have the information you need to choose between fixed and variable interest rates, so I'll leave it up to you to decide whether to stick or twist!

More: Use the Fool to compare savings accounts, compare credit cards and compare personal loans!

Disclosure: Cliff owns shares in HBOS, parent company of the Halifax.