The cost of not fixing your savings rate

Is it worth fixing your savings to get hold of a higher interest rate?

You can buy a lot with £551 million: 3,241 high-end Ferraris, two Boeing 747s or 68 years of Wayne Rooney’s time – on his current £8m a year salary that is.

But £551 million also the amount new research claims was lost last year by savers who chose to stash their nest-eggs in easy access accounts rather than fixed term ones.

So does this huge figure really prove that savers should be shunning instant access deals?

To fix or not to fix?

The stats from First Direct show that UK savers who chose an instant access account over a fixed deal lost £551 million in possible interest over 2011. The figure is £86 million smaller than the £636 million lost in 2010, a drop explained by a fall in fixed interest rates and a rise in instant access returns.

First Direct reached this figure by taking the average savings balance from 2011 – £3,243 – and working out the difference in interest this sum would accrue across one year inside an instant access account compared to a one-year bond.

According to the research the average interest payment for an instant access account in 2011 was £7.72. For a one-year bond it was £64.86,  meaning an average loss to each saver who'd stuck with an easy access account of £57.14.

First Direct places the number of variable rate accounts currently doing the rounds at 9,635,028 (according to CACI stats), bringing the total loss to just under £551 million.

So how do easy access and fixed accounts stack up rate-wise?

Head to head

Here’s a rundown of some of the current top instant access and one year accounts:

As you can see, one-year bonds pay more than instant access deals – but the difference is not huge.

The top one-year bond from Investec pays just 0.40 percentage points more than the best instant account from Coventry. What’s more, the Investec fixed deal has a whopping £25,000 minimum – compared to just £1 for the Coventry account.

It’s this deposit level divide that I suspect has contributed to the huge First Direct figure.

Deposit levels

The research has used the single average savings amount of £3,243 across one-year fixed and instant access accounts. In reality, it’s likely that one-year bond holders will make larger deposits than those with instant access accounts; in part because they are forced to by lofty minimum limits.

On the flipside, the figure for the number of variable bonds in existence will no doubt include large quantities of small deposit, ‘as good as dormant’ accounts. Not to mention bonds that used to be fixed but have now reverted to variable rates.

As a result, applying the £3,243 figure to all 9,635,028 variable accounts is likely to distort the true price of opting for a fixed deal over an instant access account. In fact, what type of bond you go for will (or should) depend more on your circumstances than the rate.

Horses for courses

When picking a savings account you should think long and hard about what you are saving for, and whether you’ll need the stashed cash anytime soon. Pulling out savings from a fixed account before the set term comes to an end will usually incur a penalty – wiping out much of the accrued interest and making the whole process pointless.

If the account is designed as a safety net for large emergency purchases and you have no other back-up funding, it’s probably best to opt for an instant access account. But if you’re planning on putting money away for the long term to fund a big purchase, a fixed account will offer a higher return.

The amount you plan to save will also impact on which account you go for. As I noted earlier, a general rule of thumb is that to get the best returns on the longest bonds, you’ll need a hefty deposit.

For example, if you’re after a one-year bond but have a deposit of less than £1,000, the Virgin E-Saver is your only option. However this account only pays out at 3%, meaning you’re actually better off going for best instant access accounts.

Longer fixes

For those who don’t need to get at their cash for a while, here are some longer fixed term options:

Your views

Would you go for a fixed or easy access account?

Let us know using the comment box below.

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