Should you wait for savings rates to rise or lock your money away? Here’s why ‘FOMO’ over future higher rates can damage returns

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  • The best 1-year deal brings in 3.32% and the best 2-year deal brings in 3.51%.
  • The temptation to “wait out” further rate hikes could hurt earnings.

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Over the past six months, the number of fixed-rate savings transactions has increased weekly, with new bargains opening left, right, and center.

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The current best 1-year deal is 3.32% and the best 2-year deal is 3.51%.

Unlike readily available savings deals, fixed rates require savers to forfeit access to their money for a specified period of time.

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This means that once the depositor makes a fixed transaction, he cannot change his mind and transfer money to another account without penalty.

Fix or Change: Savers Can Expect Further Rate Hikes, But Is It Smart?

With many expecting interest rates to continue to rise in the short term, it is believed that this could lead some savers to play a waiting game in case of “FOMO” – fear of missing out.

However, the temptation to “wait out” further rate hikes could hurt depositors’ returns.

For example, if someone were to hold £10,000 for six months in a current best-paying easy-to-pay account with a 2.1% payout and then fix it, they would need the fixed trade to make more than 4.5% for the next six months to play. the interest they would have earned 12 months from now by choosing the best deal at 3.32% now.

This suggests that a very large interest rate hike is needed for the indecision to pay off.

The delay will be even more devastating for savers whose money is languishing in accounts paying 0.1% or less.

Roughly a quarter of the UK’s savings could be in accounts making such paltry returns, according to Paragon Bank analysis.

Someone who waits for a fixed rate hike by opting to hold £10,000 for six months in an easily accessible 0.1% account will earn only £5 in interest during that time.

If they then correct, they would need a fixed deal to pay over 6.5% for the next six months to replicate the interest they would earn in 12 months by choosing the best deal at 3.32% now.

Account type (min investment) 0% tax 20% tax 40% tax
virgin money (£1+) 3.32 2.66 1.99
United Trust Bank (£5000+) (4) 3.40 2.72 2.04
Smart Save Bank (£10,000+) 3.51 2.81 2.11
Safe Trust Bank (£1,000) 3.55 2.84 2.13
Smart Save Bank (£10,000+) 3.61 2.89 2.17

Kevin Mountford, co-founder of Raisin UK, said: “Don’t wait when it comes to savings. Even if interest rates continue to rise, consumers must take action now.

“Every day, millions of people are still sitting in low-interest or interest-free accounts, such as checking accounts, where inflation is at its fullest and money loses value.

“If it is clear that the savings will not be needed in the next 12 months, it is almost always more profitable to invest them directly.

“Of course, anyone who is not sure about this, against the backdrop of rising energy prices, is playing the right card with a flexibly accessible account with easy access.”

How about a ladder strategy?

According to Raisin UK, the ladder strategy offers an alternative to savers who want to keep their money at a fixed rate while benefiting from higher rates.

This suggests that savers are fixing money for the long term with varying maturities, thus overcoming the waiting period for higher interest rates.

For example, a £10,000 deposit is divided into installments and each is invested at £2,000 at a fixed interest rate for one, two, three, four and five years.

After a year, the first fixed amount is paid, including accrued interest, and then it can be invested again at the highest interest rate.

Next year, a two-year term deposit must be paid, and so on.

Mountford said: “The ladder strategy allows you to earn interest quickly and still take advantage of future interest rate hikes.

“This means that savers are taking advantage of rising interest rates by not leaving their money in checking accounts for months on end without making any income.

“Those who need money in the short term can make it work for them in a convenient access account, and for those looking for a long-term strategy, fixed-rate annual bonds are a great option.”

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