How fixed rates could net savers £500m interest

Savers are missing out on hundreds of millions of pounds in interest a year by sticking to low-paying, easy-access accounts and ignoring short-term, fixed-rate bonds, new research reveals.

Easy-access accounts  -  on which banks and building societies can pay as little as 0.01 pc interest before tax  -  remain three times as popular as fixed rate deals.

The average one-year fixed-rate bond last year paid 2.75 pc before tax, compared with just 0.17 pc on an easy-access account. This huge difference in rates translated into a loss for savers of £553 million last year, research by bank first direct reveals.


The figures assume an average opening savings balance of around £2,500.

But savers have shunned the higher rates on fixed-rate bonds.

In the first nine months of last year, they opened a huge 8.5 million variable rates accounts against 2.57 million fixed-rate deals running for one, two and five years.

Fixed-rate bonds suit only savers who are happy to tie their money up and have no intention of using it during the term. With some bonds you can't take the money out at all, while others charge a hefty interest rate penalty of as much as the equivalent of six months' interest.

Meanwhile, some 2.4 million savers will see their one and two-year fixed-rate bonds come to the end of their term in the next few months.

They took a fixed-rate deal to earn a better rate and in the hope that interest rates would have risen once they had sat out the term. But one-year bond holders will be disappointed.

The Bank of England decided last week that base rate will remain unchanged at 0.5 pc for yet another month. Savers have now suffered historically low interest rates for two years.

One-year deals on offer now are around the same 2.4 pc after tax (3 pc before) level as 12 months ago.

Norwich & Peterborough, Marks & Spencer Money and Northern Rock all pay this, while a handful pay slightly more.

Savers reinvesting for a further year will see only a marginal, if any, rise in their income, which is fast losing its spending power.

The cost of living as measured by the retail prices index (RPI) is rising by 5.1 pc a year, Government figures released yesterday show. The Bank of England predicts that inflation is like to rise further over the next few months, before falling back next year.

At today's 5.1pc, basic-rate tax payers need to earn an unobtainable 6.38 pc on their savings, just to keep the value of their capital intact. Higher 40 pc tax payers need to earn 8.5pc and 50 pc tax payers need 10.2 pc.

Savers coming to the end of twoyear deals can refix for another two years at a better rate. In 2009, the top bonds were paying 2.4pc (3pc). Now you can earn a higher 3.08pc (3.85 pc) for two years or 3.32 pc (4.15pc) for three years.