To fix or not to fix - the savings account dilemma

According to independent financial research company Defaqto, the growing likelihood of a bank base-rate increase means people should think carefully before committing their savings to fixed-term accounts.

Despite the base-rate remaining at a record low of 0.5% for the 23rd consecutive month, there are signs that an increase is on the horizon - however, there is great uncertainty about when this might happen and by how much the rate may increase.

This presents savers with a dilemma: should they take advantage of the fixed rate bonds available now or wait until interest rates increase and secure a product giving a better return?

Defaqto offers the following tips for consumers who may be considering fixed-term savings options:

Consider bonds that allow penalty free withdrawals to give them greater flexibility with their money

Hedge their bets by spreading savings between instant access accounts and bonds - which will give them the flexibility to take advantage of better savings rates that become available when the bank base-rate inevitably increases - and also consider splitting savings into 1, 2 and 3 year bonds if they have a significant savings pot

Some bonds allow additional deposits which can benefit savers if interest rates remain low, so it may be worth exploring this

Check the terms and conditions of any savings account to make sure they fully understand the withdrawal options and any penalties that may apply

Kevin Bray, Defaqto's Insight Analyst for Banking, said: "With so much uncertainty surrounding when and how quickly the bank base-rate will rise, it is difficult for people to judge whether they should opt for longer-term savings options.  Assuming that someone can afford to tie up their savings, they need to decide whether to do this now, to take advantage of the best rates currently available, or whether to hold off until the picture becomes clearer. However, the longer someone fixes their savings for, the greater the chance of a base-rate rise and the risk of being committed to an uncompetitive rate.

"Given this situation, it is important for savers considering fixed-term options to be fully aware of the impact a base-rate rise could have.  If opting for a fixed savings account at this point, a key aspect to consider is whether and how much flexibility should be built in to ensure someone does not lose out if the base-rate increases."