If you want your savings to be solid and reliable through interest rate uncertainty, find a good fixed-rate account, says Sam Barrett.
Fixing your savings is a gamble. If interest rates fall you win, because the gap between your high rate and falling variable rates widens, but if they rise you can be left with a return that's way below what you could have received in an instant access account. It is therefore a godsend in times of falling rates, but will hamstring you if interest rates begin to rise again.
Where's the base rate headed
The only way to 'beat the house' is to know exactly when rates have peaked. Unfortunately this easier said than done and even the experts hold differing views.
So your decision to fix or not will rest not only on your opinion of future interest rates, but also on whether you are willing to face the chance of being wrong and fixing in a time of rising interest rates.
How much to invest
A number of different factors will determine which product is most suitable for you. For starters, there's the amount you want to lock away. Minimum investments vary across products and although some fixed-rate bonds and cash individual savings accounts will allow £1 investments, others require at least a few thousand pounds.
Be careful though, because products with high minimums won't automatically mean higher-interest rates.
Pumping in more than the minimum won't necessarily mean a better rate either. "Tiered rates that reward people who save higher amounts used to be common," says Sue Hannums, savings manager at independent financial adviser Chase de Vere, "but now the culture has changed." So do check whether your account has tiered interest rates.
When to fix
The length of time you fix should also be a consideration. Some advisers say you shouldn't fix for too long. Colin Jackson, an IFA with Essex-based advisers Baronworth Investment Services, recommends a maximum fixed-rate term of three years because it becomes harder to predict the future of interest rates the further ahead you look, and the more damage can be done if you get things wrong. "If rates start going up after three years you don't want to be stuck in a bad product," he explains.
Others argue that there are situations, such as putting money aside for school or nursing home fees, where having complete certainty over the future value of your savings is extremely beneficial, and therefore worth the risk.
Tax considerations
Your tax situation can also determine your choice of product, especially if you're either a non-taxpayer or a higher-rate one. Basic-rate taxpayers get some straightforward advice from Jackson: "Go with whoever offers the best rate."
Non-taxpayers though, should look for products where they can take advantage of their tax status. For instance, with bank and building society fixed-rate accounts, completing form R85 will ensure your interest is paid without tax deducted. Guaranteed bonds offered by life insurance companies, where you cannot reclaim the tax, meanwhile, are probably worth avoiding.
Conversely, the tax treatment on guaranteed bonds make them much more suitable for higher-rate taxpayers. "With bank or building society accounts they gross up the net interest and a higher-rate taxpayer's additional liability would be 20% of that. But with guaranteed bonds the additional liability is 20% of the net interest, which will be a lower amount," says Jackson.
There can also be advantages to guaranteed growth bonds from life insurance companies if you take one out when you are a higher-rate taxpayer and know you'll be a basic-rate taxpayer by the time it matures. This is likely to be the case for individuals close to retirement or planning a career break. The advantage comes because any additional tax liability is based on your tax situation at maturity - this could save you 20% of the interest you earned.
The tax-free status of National Savings & Investments' tax-free savings certificates can also benefit higher-rate taxpayers.
Penalties
Whichever product you go for, watch out for penalties. "Check the terms and conditions and make sure you're happy with them," recommends Amanda Davidson, an adviser with John Scott & Partners. "Most banks and building societies will penalise you if you need to get out before the end of the term." This tends to be a loss of interest for anything up to 180 days.
Also make sure you make a note of when the fixed-rate period is due to finish and be prepared to move your money.
None of this will, of course, ensure you 'beat the house' by making the right calls on the future of Bank of England base-rate movements, but at least you can ensure you know exactly what you are getting into and that you find the right fixed-rate deal for you.
