What’s the difference between a fixed rate, variable rate and notice savings account? When can a bank raise – or reduce – the interest rate?
Savings accounts explained
A savings account pays you interest on money you have in it. The interest can be paid once a year, once a month or – in some cases – when the account matures.
Variable rate accounts
Most savings accounts are variable rate accounts. That means that the bank or building society can raise or lower the interest rate.
That means a variable rate savings account might be advertised as paying an interest rate of, say, 1%, but the bank or building society could change that interest rate. It does have to let you know if it’s going to reduce the interest rate by more than a certain amount, but it’s really down to the bank or building society to decide whether and when it wants to change the interest rate.
SAVVY TIP: This means that you can find yourself in the situation where you’ve opened a savings account or transferred savings you already have, on the basis of an interest rate that’s been advertised, only to find it drops soon after.
The bank or building society may put some restrictions on when and how you can take money out, but variable rate savings accounts are often easy access accounts. This means you can take money out as and when you want.
Fixed rate accounts
These accounts sort of ‘do what they say on the tin’. The interest rate is fixed at the outset and lasts for a set period of time. It’s generally anything between one year and five years, although it can be a different period of time (or ‘term’ in the jargon).
There are two things it’s important to be aware of with fixed rate savings accounts:
- There’s a limited period when you can pay money in. Usually you have between 14 and 60 days from when you open the fixed rate savings account, to pay money in. After that period, you can’t top up your account.
- You can’t take money out until the fixed rate term is over. Generally, once you’ve paid money in, that’s it. You can’t take it out if you need it before the term is up.
SAVVY TIP: The fact you can’t top your fixed rate savings account up after the initial period can be a problem, especially when it comes to using your ISA allowance. The reason is that if you take out a fixed rate cash ISA and can only pay in – say – a few thousand pounds at the time, you can’t top it up later. And you can’t take out a second cash ISA in the same tax year. Currently, the ISA allowance is £20,000 a year (in tax year 2019-20). If you have a fixed rate savings account but you can only pay in a limited amount when you open it, you could miss out on most of your ISA allowance.
If you have a notice savings account, it means you have to give ‘notice’ before you can take your money out, Normally this means you have to write to the bank or building society, or phone them, between 30 and 90 days before you want to take your money out. The notice period varies from one account to another.
You may get a slightly higher interest rate than you’d receive on an easy access savings account, but it’s not guaranteed.
SAVVY TIP: Always check how you have to give the bank or building society notice. If you have to do this by post, it will add several days (as a minimum) to the notice period.
How to get the highest rate of interest
There are several factors that will affect the interest rate you earn on your savings;
- The bank or building society you have your account with. Generally speaking, high street banks pay the lowest interest rates and challenger banks pay higher interest rates.
- How much money you have in your account. Often, the more you have in your account, the higher the interest rate you’ll earn. However, sometimes it works the other way and the bank may pay a higher rate on the first few thousand pounds, and less on higher amounts.
- How you can open and manage your account. Internet-based savings accounts tend to pay higher interest rates than branch based or postal accounts. Sometimes a locally-based building society will pay a higher rate of interest on a branch-based account because it wants to encourage customers into the branch.
- Whether you have a fixed rate or variable rate account. Normally, you’ll earn a higher rate of interest on a fixed rate account than with a variable rate savings account.
- Whether you have locked your money away. If you have a five year fixed rate account, you should receive a higher rate of interest than if you have your money in a one year fixed rate account.
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