Fixed rate savings accounts offer consumers a fixed rate of interest on the money deposited into the account for a set amount of time. The catch is that you won’t be able to access that money for the same period, without incurring a huge drop in the amount of interest you were due to earn or another penalty. These savings accounts differ from standard accounts because they provide fixed rates rather than variable interest rates (where the rates fluctuate depending on the Bank of England base rate).

There are a couple of risks involved in locking cash away for a long period of time, so only those who are incredibly comfortable with the idea should consider applying for a fixed rate savings account. Tying your cash up is a problem in terms of access but it does mean that you are able to snag yourself some great interest rates.

Access

As we mentioned, in return for the higher interest rates you have to stick to your side of the bargain and lock your money away. There are varying different term lengths for fixed rates but the minimum is likely to be one year. Before you open a fixed rate savings account it is so important to really consider whether you will need access to that money quickly – what would you do in an emergency? Do you have a back-up source of income?

Term

The longer you fix for, the higher the risk associated with fixed rate savings accounts. Although with a fixed rate you will not suffer from dips in the interest rate, you will also not benefit from peaks. The unpredictable base rate could suddenly increase but you would not be able to get out and deposit your money with a higher paying provider.

Fixed rate savings accounts often provide terms from 6 months up to 5 years so you could always opt for a fixed rate saver with a shorter term – this would offer you more flexibility while still allowing you to benefit from the high interest rate on offer.

Interest

Fixed rate savings accounts don’t usually pay monthly interest, unlike variable savings accounts, so some people avoid fixing. However, there is a way to work around this annual interest payment. If you have a lump sum, consider how much you would like to earn in interest, and then see if there is a way to earn the same amount on a smaller sum.

For example, if you have £200,000, you could invest £190,000 in a fixed rate account paying 5%, and put the remaining £10,000 in an instant access variable rate account. You could use the £10,000 to supplement your income, and when you get the 5% interest payment from the fixed rate account you could use it to make up for your spending from the instant access account.

This is one way for people who rely on using interest earnings to supplement their income to benefit from fixed rate savings. However, the downside comes if you need to invest your whole lump sum to gain the interest required, so, in this case, the above method would not work for you.

Alternatives

If you currently use a standard variable savings account you can still get great interest rates, but it takes a lot more work. As the Bank of England base rate varies, so will your interest rate. This means you will need to constantly monitor your interest rate and compare savings accounts to ensure you are getting the best rate available on the market.

If you are looking for guaranteed good rates, something that a variable savings account cannot offer, you might want to consider an index-linked savings bond.

As with fixed rate savings accounts, you need to lock your money away in order to achieve the good rate. However, with an index-linked savings bond you are paid the percentage change in inflation which means that your cash is no longer shrinking in real terms due to inflation, thus increasing your spending power. Some of these accounts are tax-free but generally you will be taxed.

Another way to guarantee a good interest rate is to get a base rate tracker account. While these accounts require you to tie up your money, they do offer you the peace of mind that your interest rate will be above the Bank of England base rate.

At the moment the base rate is still at its historic low of 0.5%, so it is incredibly unlikely that it would fall further and you could be missing out on a higher rate. However, if the base rate were to increase in the future a base rate tracker could prove to be a suitable alternative to a fixed-rate account.

Applying

Before you apply it is essential that you compare savings accounts and find an account that is able to meet your personal requirements. Online comparison tools and tables should be able to help you compare savings accounts so you can find the best interest rates and other features.

Once you have chosen an account, you need to be very careful when applying to ensure that you are getting the rate that was advertised. Most of the time this won’t be a problem, but there is always the possibility that the bank will cut the interest rate at some point and try to offer you a fixed rate savings account with a lower rate. Before you tie up any cash in the account, double-check the interest rate.

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Banks offer a wide range of incentives to consumers to encourage them to switch their banking.  Packaged current accounts often offer travel insurance, an interest-free overdraft and mobile phone protection to account holders who move their current account, while some deals offer preferential rates on other financial products.

Now, however, a leading newspaper has found that some of the best packaged bank accounts offer poor rates of interest on bank savings accounts. While many banks advertise ‘preferential rates on savings’, the reality is that rates on offer can often be very low.

The best packaged bank accounts

Banks have increasingly managed to sell customers so-called ‘packaged current accounts’ over recent years with the Financial Times suggesting recently that over a quarter of consumers are thought to have been sold such an account. These products have a monthly charge but offer a range of insurance and other benefits in addition to standard banking facilities.

The FT has found, however, that the rates offered on bank savings accounts frequently fall below the Bank of England Base rate of 0.5 per cent. The newspaper highlights two leading banks who charge for their accounts but offer rates of 0.2 per cent or below on savings.

Banks have defended the low rates, pointing to the high cost of providing banking facilities and the record low Base rate.

Compare bank accounts with other products

When you compare bank accounts it is worthwhile checking both standard and packaged current accounts. You may even be better with a separate bank account, high interest bank savings account and specialist insurance rather than taking the best packaged bank accounts.

This is a view shared by the City regulator, the Financial Services Authority (FSA).  The FT reports that ‘the FSA has suggested that customers are often better off purchasing services offered within these accounts separately, or not at all.’

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You may or may not be aware that massive changes to the banking system are on the horizon – if not you should be.

On 16 June 2010, the Chancellor of the Exchequer announced the creation of the Independent Commission on Banking. The purpose of the commission is to consider reforms to the structure of the banking sector. They have been tasked with making recommendations to the Government to promote financial stability and competition with the aim to avoid the need for another bail out.

Why are the changes to the banking system needed?

The events of the financial crisis that started back in 2007 highlighted the need for changes to be made to the way banks operate. Lenders and borrowers took excessive risk while banks were lending too much money out without having the assets to support it. This is why the Government had to step in and inject vast sums of taxpayers’ money to avert crisis. The basic goal of the commission is to make the UK bank system stable and make the marketing of banking services more competitive. The final report is due at the end of September 2011.

The reforms put forward within the interim report broadly break into two parts:

1.    Increase competition between banks
2.    Reduce the risk to the public if banks collapse,

The question on everyone’s lips is “how will this affect me?”.

1.    Increased competition between banks

• Switching services – The general opinion seems to be that switching bank accounts is slow and complicated and only ever done if needs must or if a particular bank is running an attractive switching incentive. The commission want to make this a simpler, faster process which is more appealing. This will be great for consumers as the banks will need to be far more competitive in terms of products on offer and general service if they want to keep customers. They would also like to look at introducing portable account numbers to aid consumers and simplify the re-directing of regular bills after switching. Consumers would have one account number that would stick with them regardless of what bank they choose to move to. Customers wouldn’t be required to transfer direct debits or standing orders as the account number would remain the same.
• Making it easier for customers to compare current accounts – The commission wants the banks to label and price products clearly so that customers can compare easily and without confusion.
• Lack of competition within the current account market – Up to 70% of Brits bank with one of the ‘big four’, those being Lloyds TSB, Barclays, HSBC and RBS. Lloyds TSB, after its merger with HBOS back in September last year, dominates this market and the commission fears that this is stifling competition. It has suggested more branches to be sold off in order to get back in line with the likes of RBS, Barclays and HSBC. This in turn could lead to the emergence of entirely new banks.

2.    Reducing risk to public if banks collapse

• The final recommendation stated the need for Britain to have ‘stronger, safer banks’. This would involve separating, or ‘ring-fencing’, retail banking and separating it from riskier investment banking. By doing this the commission feels that it would protect retail customers from any future crisis and reduce the need for state-sponsored bailouts. Another suggested step here is for banks to hold more capital. At present, banks hold back £7 for every £100 that is free to lend; the commission suggests upping this to £10.

With customers being able to switch current accounts more easily, it is expected that the banks may take this opportunity to increase promotion of their best packaged accounts. These accounts normally charge between £10 and £15 a month but do come with benefits such as travel insurance and breakdown cover. Consumers wishing to seek an alternative should perhaps look into prepaid cards which offer a simple, cost-effective way to manage money. Wages can be paid directly on to the card and then used like a standard debit card. With many cards offering features such as ‘Credit Builders’ and ‘Budget Masters’, these products could work well for users looking to get their finances in order.

Whether you choose to stay with the banks or try out prepaid products, it’s clear that there are going to be some big changes on the horizon for both the banking sector and bank account holders. Now we just have to see what the final outcome will be.

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Have you ever wondered how banks exchange money among themselves? Do you envision one bank borrowing, say, £1,000,000 from another, and exchanging suitcases full of banknotes?

Well, it’s not exactly like that.

Notes issued by banks in England, Wales, Scotland, and Northern Ireland have to be backed by Bank of England (BoE) notes that are held by the issuing bank. To avoid the problem of suitcases full of UK banknotes, the BoE issues special internal notes called Giants, with a denomination of £1,000,000. They now also make the Titan banknote, which is worth £100,000,000, but there are only around 40 of these in existence.

But if you work the till at your local Sainsbury’s, you needn’t worry about having to make change for a customer bearing a Titan banknote, because they are not used in general circulation. Banknotes like Giants and Titans are held by banks and “ringfenced” by the Bank of England for the benefit of noteholders from banks. That means that if an issuing bank fails, the noteholders can get the full value for the banknotes they hold, regardless of whether they are Scottish banknotes, Northern Ireland banknotes, or other banknotes backed by BoE notes.

When you compare bank accounts, you don’t have to worry about whether you are issued Bank of England notes, because Scottish and Northern Ireland banknotes are backed by BoE notes and are fully protected and insured. In fact, in the UK, seven retail banks are allowed to print their own banknotes in addition to the Bank of England. While this is an unusual situation, it is not unique. Hong Kong, for instance, has a similar arrangement, with three banks, in addition to the Hong Kong government, being allowed to issue their own banknotes.

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Do you know what interest rate your savings account is paying?

New research from the consumer watchdog Which? has found that almost half of the 1,250 savings accounts on offer in the UK pay an interest rate of 0.5% while one in four pays 0.1% net or less – just £1 a year for every £1,000 saved.

The Guardian reports that these low interest accounts are costing Brits a staggering £12 billion each year in lost interest.

Look for the best savings accounts

If you want to maximise the returns you are getting on your money, your first step is to find out what interest rate is being paid on your savings account.  This is particularly true if you stash your savings with a big high street name.  According to financial information firm Moneyfacts, Halifax, Nationwide, Barclays, HSBC and Santander all have accounts paying just 0.1%.

Speak to your current savings provider to see if they have a better account.  And, make sure you shop around to find out if there are better homes for your hard earned cash.

Head online to find the best high interest savings accounts

Many of the best savings accounts can be found online.  Lots of providers now offer web-based accounts which can pay up to twenty or thirty times the interest rates available on high street passbook accounts.  Use a savings comparison website to research the rates that are available, remembering to check whether quoted rates include bonuses and what access you will retain to your money.

Using savings data from the Bank of England, Which? estimates that leaving your money in poorly paying accounts rather than switching to high interest savings accounts costs £322 a year for every saver with an easy-access or notice savings account.  So, what are you waiting for?  Compare savings accounts to find a better deal now.

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The Bank of England (BoE) today published their quarterly credit conditions survey for the 2010 Q3 period. The BoE questioned bank and non-bank lenders between 13th August and 3rd September on their activities and perceptions.

According to the survey, the unsecured credit that lenders made available to householders remained quite flat. Interestingly, consumer demand for credit card lending fell unexpectedly during the period while demand for non-credit card lending rose unexpectedly.  Credit card providers had expected a slight easing of credit scoring criteria, but there had been little actual change.

However, lenders are more upbeat about the final three months of the year. They expect both the availability and demand for credit card lending to increase over the next three months. They also expect default rates on credit card lending to fall further during the period. They also report that credit scores may ease slightly in the coming months.

So what does this mean for consumers looking for a credit card?

Issuers may be a bit behind their targets after an unexpectedly slow Q3, so there should still be some good deals out there.  The amount of credit you can borrow on a credit card is likely to remain about the same. For some consumers, it might be slightly easier to get accepted for one of the cards requiring a ‘good’ or ‘excellent’ credit score, but this difference is likely to be quite small.

Consumers should have a strong range of credit cards to choose from and this is likely to continue until the end of the year. It is interesting that there was an unexpected rise in non-credit card unsecured lending. Could this be in part due to the growth of the payday loan sector, which has recently come to the attention of the FSA?  Time will tell but, overall, it is a reasonably encouraging picture for consumers looking for a credit card.

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Are you struggling to get a decent return on your savings?

Rates on instant access savings accounts have fallen significantly over the last couple of years.  The credit crunch and the Bank of England’s decision to slash the base rate have meant that it is harder than ever to make your savings work for you.

If you don’t put your hard-earned cash in the top savings accounts, inflation will mean that you are actually losing money in real terms.

Beating inflation

Inflation in July 2010 fell to 3.1 per cent, although this is still significantly higher than the target of 2 per cent the Bank of England is currently trying to meet.  Taking income tax into consideration, it means that as a basic rate taxpayer, you need to earn at least 3.88 per cent on your savings to avoid the value of your money falling in real terms.

If you are a higher rate taxpayer, you will have to earn 5.17 per cent on your savings.

Top savings accounts

Recent research from the Daily Mail has found that only around 7 per cent of the savings accounts currently available on the market offer a return of at least 3.88 per cent.  There are very few instant access savings accounts that offer this rate of interest and many of the accounts that offer this return are savings bonds which require you to commit your money for between three and five years.

Consider savings bonds or an ISA

One way to find an account that will help you beat inflation is to consider an ISA.  Some ISAs are instant access savings accounts and some are more like traditional savings bonds where you have to commit your money for a period of time.  However, all ISAs pay interest without tax being deducted.  This means that if you are a basic rate taxpayer, you only need to find a rate higher than 3.1 per cent to ensure your money is not losing value in real terms.

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If you haven’t yet made your News Year’s resolutions because you are struggling to find some achievable goals, why not aim to make good use of your tax-free ISA savings account allowance each year from now on?

This tax year, which runs from April 6th 2009 to April 5th 2010, every adult in the UK aged between 16 and 49 can save a maximum of £3,600 in a Cash ISA, with a higher limit of £5,100 for all Britons aged 50 and over.

The higher limit for the over 50s came into effect on 6th October 2009 and will extend to all other UK adults from April 6th 2010.

The best thing about having an ISA is that you don’t pay ANY tax on the interest you earn, so if you are a higher rate taxpayer you will get to keep 40% more of any interest you make on your ISA savings.

Since the Bank of England dropped the UK base rate to a record low of 0.5% in March 2009, savings rates have plummeted meaning you have to do everything in your power to get some good returns on your savings. One of the easiest ways to do this is to keep the interest you do earn away from the taxman.

Plus, you needn’t worry about having to lock your money away for a long period of time, if you don’t want to, because there are plenty of instant-access ISAs available.

If you haven’t opened or invested in an ISA since 5th April 2009 you can still open one and invest your full allowance by the end of April 5th 2009.

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