Trapped in a fixed-term account? Here's what you can do to avoid missing out on the best savings rates

While we're seeing an increasing number of providers pay more than 5% AER for some savings accounts, those who opened fixed-term account before the rates rocketed may be frustrated at being stuck with shoddy interest. 

The rules around fixed-term account withdrawals and closures varies. Some provider won’t allow it, others only allow you to break the contract in exceptional circumstances. However, in some instances you can close or make a withdrawal early for a loss of interest - so you'll need to weigh up whether or not this loss is worth it.

Here, we look at the current top-rate fixed savings accounts, and suggest some more flexible ways to save.

What are the best fixed-term rates?

The table below shows the top rates for one to five-year fixed-term savings accounts, in order of term.

_{Source: Moneyfacts. Correct as of 11 November 2022, but rates are subject to change.}

There's a lot of competition for these top spots, and over the past few weeks we've seen new market-leading accounts announced almost every day. 

Much of this is thanks to successive hikes to the base rate, which is now at 3%. This dictates the interest banks have to pay to borrow from the Bank of England - as it rises, they tend to look to savers' deposits for a cheaper way to fund their borrowing. 

If you took out a fixed-term account between the end of March 2020 and December 2021, when it was at the historic low of 0.1%, the savings market was a different story.

For example, just a year ago, the best rate available for a two-year fixed-term account was 1.76% - nearly three times lower than the current best rate of 5%. If you'd committed to a five-year account last November, the highest interest on offer was 2.05%, compared to today's 5.05%. 

If you saved £20,000 in 2021, the lower rates mean you'd be missing out on around £1,382 interest with the two-year fixed account, and be down £3,574 after five years - compared to saving with the top rates today.

Now let's suppose you took out a five-year fixed-term savings account last November, depositing £10,000 at the top rate of 2.05%. Compared to the interest you could earn today, you'd be down around £1,787 in interest after five years.

• Find out more: How to find the best savings account

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Should you close a fixed-term account early?

While no savings accounts can keep up with the current rate of inflation, it's important to make sure your savings are earning as much interest as possible.

That being said, you shouldn't panic if your fixed-term rate is being beaten by the latest accounts. Yes, you are missing out on potential interest - but you'll also have to forfeit interest if you try to leave the account early (if you're allowed to at all, that is).

Providers that do allow earlier access charge interest penalties typically between 90 and 365 days. If you've only had the account for a year and you pay a 365 day interest penalty, it won't have grown at all. It's important to consider whether a new account would be able to make up for this loss before the end of its term.

Try the 'split and save' strategy

To avoid the issue of locking all of your savings in one fixed account, it could be worth splitting it up across several accounts.

For example, a sum of £10,000 could be spread evenly across one, two, three, four and five-year fixed-term savings accounts. After 12 months, the £2,000 saved in the one-year account would mature, and could be moved into the best five-year account. 

The following year, your two-year account would mature and you could do the same. Eventually, you’d have several five-year fixed-term accounts on the go, with one maturing each year. This approach means that you won’t miss out if savings rates rise in future.

Try an instant-access account

To avoid the issue of locking up your cash, instant-access accounts can be useful. Rates aren't as high as fixed-term accounts, but they've also been on the rise. The highest rate for a restriction-free account is from Al Rayan Bank, offering 2.81% EPR (this is a Sharia-compliant product, and pays an expected profit rate as opposed to an annual equivalent rate).

If you're after instant-access tax-free savings, Ecology Building Society currently has the best rate of 2.7% AER. 

• Find out more: how to find the best cash Isa

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Consider your tax bill before you commit

One snag to higher interest rates is that the interest earned in a savings account is taxable. The personal savings allowance means basic-rate taxpayers can earn up to £1,000 a year in savings interest tax-free, while higher-rate taxpayers get a £500 limit. Additional-rate taxpayers have no personal savings allowance.

In a climate of low savings rates, these allowances have been more than enough for most savers not to worry about exceeding them - but, the higher rates rise, the easier it will become to end up with a tax bill. 

So, if you are a basic-rate taxpayer and were to invest £19,500 in an account paying 5% AER, you could expect to earn just over £1,000 in a year, which would exceed the personal tax allowance. At the same rate, a higher-rate taxpayer could exceed their £500 allowance with just £10,000 saved.

• Find out more: The personal savings allowance explained