I’ve spotted a savings account offering 3.8% interest, which is the highest rate that I’ve seen for years – should I go for it?

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Hard-Earned: Should Our Reader Lock Savings in an Account Paying 3.8%?

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I noticed a savings account with an interest rate of 3.8%, which is the highest rate I have seen in years.

However, I would have to lock up my money for three years.

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Should I go for it, choose an account with a shorter term, or wait even better? LV, York

Ruth Jackson-Kirby responds: Savers are finally being offered some of the best interest rates in over a decade after years of miserable returns.

The improvement in rates is largely due to the fact that the Bank of England raised the base rate to fight inflation. The base rate is the benchmark from which banks set their own interest rates on savings and loans.

You are absolutely correct that the Hampshire Trust Bank is now offering a rate of 3.8%, the highest savings rate available at the time of publication.

But this does not mean that you should definitely rush to block this or another high-paying account.

First, this account requires you to lock up your money for three years. Experts believe interest rates will continue to rise over the next few months, so entering into this or another multi-year deal could mean you’re left behind. Anna Bowes, co-founder of Savings Champion, says: “I can’t say exactly what the savings rate might be in the next few months and years. But there are signs that there will be a further increase in the base rate, which will lead to an even greater increase in the savings rate, including on fixed-rate bonds.”

The problem with putting your money into a fixed rate account for several years is that it is really locked up. If you want to access your money sooner, you will typically pay a penalty that will void the higher rate that initially attracted you to the account.

In some cases, you simply cannot withdraw your money unless you have a very good reason, such as being diagnosed with a terminal illness.

You can get a rate that is almost as high, but with a much shorter term. For example, the most profitable annual fixed rate account is 3.4% from the Chartered Savings Bank, which is not much lower than the three-year fixed income of 3.8%. Choose a two-year fixed-rate bond from the Chartered Savings Bank and you can get 3.7 percent.

While higher interest rates are certainly good news, there is not a single account that comes anywhere close to beating inflation.

Inflation is currently 9.9 percent, according to the Consumer Price Index (CPI). This means that if you have £1,000 in cash, the purchasing power in a year will be equivalent to only £901. But if you put your £1,000 into a savings account with a 3.4% return, it will have a purchasing power of £932 a year later – an improvement in cash holding, but still a significant loss in value.

To have a better chance of dealing with inflation, you need to invest your savings. If you don’t have to spend it for at least five years and are comfortable taking some risk, this might be a good option.

However, keep in mind that you may end up losing money and the financial markets are volatile at the moment, so you need to be able to navigate the ups and downs.

You may find that compromise offers the best solution. You can put some of your savings into a fixed rate account for one or two years to get one of the best rates. You can then deposit the balance into an easy-to-access account, ready to take advantage of even better rates should they come up.

Best Instant Access Savings Account pays 2.1% at Al Rayan Bank. You can get 2.52% from BLME if you are willing to notify 90 days prior to withdrawal.

Finally, if you are interested in investing but are nervous about current volatility, you can transfer a small amount of your savings to an investment account each month.

Most investment platforms allow you to set up a direct debit of around £25 per month. This way you don’t risk putting all your money in right before the market falls.

Credit: www.dailymail.co.uk /

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