Snapping up a market leading bond seems like a smart move, but could you suffer in the long run?
It appears to be a decent time to be a saver.
After years of incredibly low rates on offer on all forms of savings deals, things are shifting now with providers competing for our money through hiking the interest rates on offer.
A good example has been the approach of National Savings & Investments (NS&I), the Government-backed provider which runs Premium Bonds.
NS&I is not usually one to target the top of the best buy tables, yet it’s so keen to bring in our money that not only has the prize rate on Premium Bonds been increased repeatedly but so too have the rates on its more traditional savings accounts.
Last week it increased the rates on its one-year guaranteed growth and guaranteed income bonds to levels noticeably higher than you can get elsewhere, while it previously revamped its three-year Green Bond to deliver far more exciting returns.
What comes next?
However, there is a danger in moving too quickly when it comes to maximising your savings returns.
It’s great to snap up a market-leading deal when it’s available, but the benefit soon disappears if circumstances change and the account no longer looks like such a winner.
For example, the expectation is that there is still another raise or two to come for Bank Base Rate.
Inflation has not fallen enough to placate the Bank of England, meaning we may see Base Rate moved beyond its current level of 5.25%.
If that does happen, then it’s likely that we will see the interest rates paid on savings deals move higher than their current levels.
That fixed rate bond looks like a winner today, but if rates do continue to rise then within a couple of months there may be better options on offer.
Today’s market-leading savings deal could easily be tomorrow’s also rans.
The inflation question
While rates on savings deals have grown so substantially in recent months, it is important to bear in mind how they shape up next to inflation.
Inflation has remained stubbornly high for a long time, making life harder for savers.
If your interest rate does not beat inflation, then while the balance is growing, it is still effectively losing value in real terms.
And while inflation has clearly peaked, it is dropping so slowly that there are still precious few savings deals that beat it, given the consumer prices index measurement stands at 6.8%.
The lack of a crystal ball
No-one knows exactly what the future holds, which makes it so challenging for savers.
You don’t want to move too quickly, but equally you don’t want to wait too long and miss out on the top deals.
So what should savers do?
There’s clearly a balancing act to pull off.
The first step is for savers to work out for themselves what they think is likely to happen next. Clearly there is no guarantee, and events can adjust things, but we can all make an educated guess.
And if the expectation is that rates have further to rise, then it can pay to be a little careful.
If I had a large stack of savings I know that I would not be rushing to lock it up for a lengthy period right now, given the likelihood of further hikes to the Base Rate.
Instead, it may pay to take a more long-term approach.
That may mean holding off until you’re convinced that rates have peaked, and then lock the money away for longer.
Alternatively, it may be worthwhile putting money away in chunks ‒ sticking a portion in a leading fixed bond today, and then another portion of your savings into a top bond in a month or two.
That way, while you may never get the absolute best return on all of your money, you can boost your overall position.
There are no easy answers for savers.
But it’s been a crucial reminder of how important it is to engage with your savings, to keep an eye on what’s going on with interest rates and be ready to move your money when necessary.