Is a fixed rate the best way to grow your savings?

You’d be forgiven for leaving your money in the same account for years – after all, savings accounts have earned paltry amounts of interest (often barely more than 1%) in recent years.

However, after 14 interest rate hikes over the last two years, savings accounts are once again an attractive proposition with much higher rates than previously on offer – so, if you’ve not thought about switching things up, now might be the time.

But, before you march online and find the first decent-looking rate you see, there’s something else to consider: these interest rate rises are giving many savers something of a quandary. Should you lock in these tantalising rates with a fixed-rate savings account that ties your money up for a set amount of time?

Much will depend on what you think will happen to interest rates; at the moment, the consensus is that interest rates have peaked – especially after the Bank of England chose to hold interest rates at 5.25% in December.

Mark Hicks, head of active savings at Hargreaves Lansdown said: “The pause is likely to cement expectations that we’re at the peak right now, and the next move will be downwards. This is already being priced into the market, and we’ve seen rates come down.”

This would suggest that now is the time to bag these fixed-rate deals while you can. However, no-one is predicting rates to fall as quickly as they rose.

Hicks added: “The market isn’t expecting imminent and rapid falls in the Bank of England rate, so we’re not seeing massive drops in savings rate. This is more a case of a solid downward trend we expect to endure in the coming months.”

However, in spite of this view, another interest rate rise can’t be completely ruled out. In December’s Monetary Policy Committee meeting, three of the nine members voted in favour of a 0.25% hike.

The truth is there isn’t a one-size-fits-all answer. While it’s possible to argue that now is the best time to fix, there is also an argument over the merits of waiting, or even in choosing an entirely different type of investment.

So, what’s the right answer?

When you are picking a savings account – or any other investment – it’s important not to think about your returns in isolation.

You need to look at your situation, your attitude to risk and your plans for your cash, as Katie Volker, financial planner at Volker Financial Planning explains:

“No one can predict with certainty what the future holds. When considering what to do with your money, whether to keep your money in cash or invest, it is important to look at your own financial goals and objectives, risk tolerance and capacity for loss to make an informed choice that is suitable for you.”

For example, there’s no point going for a fixed rate that could tie your money up from anywhere from 12 months to five years, if you might need it for a holiday or you’re contemplating helping out your grandchildren in the near future.

Instead, an easy access savings account offers just that – the instant ability to withdraw money whenever you need it. Easy access accounts normally pay less than fixed rates but, at the moment, the difference isn’t huge, particularly when comparing them with one-year fixes.

Of course, it’s also worth giving some thoughts to tax. Instead of a savings account, you could consider a cash ISA (either an instant access or fixed-rate option), and in doing so, anything you earn from your savings will be protected from tax.

At the time of writing, each year you can pay in as much as £20,000, and that can be spread across different types of ISA (i.e. Cash and Stocks and Shares). In doing so, this could yield some decent returns.

But before you decide to jump straight into an ISA, it's important to work out whether you'd need to pay tax on your interest from another kind of savings account, which would then give you more freedom to choose where to place your money.

Every year you get a Personal Savings Allowance from the government, depending on the type of taxpayer you are. Basic rate taxpayers (20%) can earn £1,000 interest tax free. Higher rate taxpayers (40%) can earn £500 in tax-free interest each year. Additional rate taxpayers, however, (45%) don't get an allowance.

Is a savings account the right option?

If you are in the position to tie your money up for a while with a fixed rate, and want it to grow, it might even be worth investing.

Katie Volker points out that even though interest rates on savings account have gone up, inflation may still reduce the spending power of your money over the years. While inflation has dropped of late, you still want to ensure your savings are growing at a decent rate for what you need the money for, and to plan accordingly.

She says: “Investing your money offers the potential for higher returns and to outpace inflation, but it also comes with the risk of market fluctuations.”

This is because the value of stocks and shares rise and fall over time, potentially putting your entire investment at risk - unlike cash savings where you know exactly what rate of interest you will get.

It’s relatively easy to start investing.  Online platforms offer low-cost stocks and shares ISAs, with plenty of guidance to help new investors get started. However, if you aren’t sure what to do, you could always consider independent financial advice.

Even when interest rates are high or the stock market is booming, it can be tricky making the right choice. You need to think about your plans for that money, when you will need it and the level of risk you are prepared to take.

As Katie Volker says: “Ultimately, the decision depends on your individual circumstances and long-term financial goals and shouldn’t be influenced by current interest rates alone.”