Why it can pay to be fined for leaving fixed-rate savings accounts early

Adam Edwards 11th Aug 2023 No Comments

Reading Time: 3 minutes

Adam Edwards looks into the reality of fixed-rate savings accounts…

The Bank of England may be raising interest rates, but very few banks are passing these on to savers.

In fact, the banks have been sharing less than 30% of these much-needed lifelines to savers, according to research released last month by the Financial Conduct Authority (FCA).

If you’re earning a fraction of the 5.25% base rate on your nest egg, you’ve probably considered switching accounts. But that’s not always so easy to do, especially if you locked your money in at a fixed interest rate before the recent flurry of rate rises.

But it may actually pay to take the hit, pay the fine for leaving early and move your money into a better account.

For more information on how to do this, read on or click on the following links:

How to make money – by getting fined
The best rates for savers
The highest fixed saving rates right now
Other ways to invest

How to make money – by getting fined

One of our readers, Simon* (whose name we have changed for data-protection purposes), was unfortunate enough to tie himself into a low interest rate just a few days before the Bank of England’s June base rate rises.

He had £34,000 in a savings account at the Skipton Building Society that was about to mature, which he let the Skipton roll over into another two-year Fixed Rate ISA paying just 2% interest.

However, rather than keep his savings tied up in an account paying so little, a regretful Simon decided to pay the £353 penalty fee to withdraw the money early, and moved the remaining amount into an 18-month Fixed Rate ISA at the Skipton paying 5p% last month.

He did the maths, and found that by biting the bullet and paying the penalty to switch, he’ll be over a £1,000 richer after the first year alone.

Best rates for savers

If you’re worried interest rates might rise again, but don’t want to tie your money into a 5% fixed rate ISA like Simon did, Beehive Money (https://www.beehivemoney.co.uk/) had the easy access saving account paying the highest interest, as of the start of this month. The online bank is offering 4.6% on savings of £1,000 or more.

It’s worth noting, however, that you may have to move that money in September next year, as that figure is scheduled to drop to just 2.5% next autumn.

Alternatively, Secure Trust Bank (https://www.securetrustbank.com/) is offering a flat 4.55% on savings between £1,000 and £85,000, if you can’t be fussed switching again next September.

The highest fixed saving rates available

You can earn even more if you decide to lock your money into another fixed rate ISA rather than keep it in an easy access account.

The rates are always changing, though, so you need to shop around to make sure you’re definitely getting the best bang for your buck.

Kara Gammell, personal finance expert at MoneySupermarket, said:

“If you want your money to work harder for you, it could be time to switch your savings to make the most of the higher interest rates on offer.

“For example, in early August 2023 Aldermore Bank is offering a two-year fixed savings account earning 6% via MoneySuperMarket.com. In August 2022, the best two-year fixed rate account available via MoneySuperMarket.com offered 3.15%.

“So, with these examples, if you have £25,000 in savings you could earn £712.50 more in interest in the first year with the Aldermore account.

“However, it’s crucial that you double check the small print for exit penalties on withdrawals as these could nibble away at your nest egg. Some savers may find that after doing their sums, the higher interest on offer may cancel out the cost of an early withdrawal.”

Other ways to invest

For ideas on other ways to make your money work for you, read our piece on Five ways to grow your wealth without savings accounts.

You can also read this piece on how to invest in the gold market.

And don’t forget to sign up to our fortnightly MoneyMagpie Investing Newsletter.

Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence.