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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There are mixed views on what 2011 has in store for us. Some say that 2011 could see many in the UK turn the corner as we ease out of the recession, but others predict one more year in a longer slog.

Regardless, many Brits said in a survey by NS&I that they want to put aside more money in 2011. Nearly 30% of Brits have said that they intend to increase the amount they save in the new year.

So what can you expect from your own savings accounts in 2011?

Most predictions are that the Bank of England base rate will stay at 0.50% for most or all of the coming year, so you probably won’t see any significant improvement in your rates. Even if the Bank of England raises the base rates, the best savings accounts may see little improvement in rates for savers because banks are actually paying a record margin above the base rate to savers right now. If the base rate were to increase, many experts expect a lag before savings interest rates would start going up too.

The good news for savers in 2011 is that competition is still quite fierce. With the entry of Virgin Money and Tesco Bank into the savings game, banks will likely find themselves competing for your business with perks and bonuses. These may not amount to much, but will give you extra variables to consider when you compare savings accounts to assess whether you need to switch accounts or not.

One factor that will affect savers is that the ISA allowance will increase again. For the 2011-2012 tax year, ISA savers’ annual ISA allowance increases from £10,200 (maximum £5,100 in a cash ISA) to £10,680 (maximum of £5,340 in a cash ISA). It may not sound like much, but any savers who are able to take advantage of these higher limits should definitely do so.

Additionally, your money should be somewhat safer in 2011 over previous years. Under the Financial Services Compensation Scheme, the protection increased from £50,000 to £85,000 on 1 January 2011.

Banks may not be offering better interest rates on savings accounts, but they are still competing for your business. Even those who are generally satisfied with their savings accounts would be wise to compare the offerings from several banks to see if it would be worthwhile to switch. Comparing and switching bank accounts is easier than ever to do, and it looks as if savers are going to have to be chasing the best interest rates and other perks for another year to get the most from their savings.

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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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