When deciding how to hold your wealth, there are several factors to consider. For example, you might need to think about the level of interest you generate and how easy it is to access your savings.
If you have funds that you don’t need to use right away, a fixed-term savings account could be a useful option. These savings accounts offer a set interest rate for a certain period of time.
In many cases, you’ll benefit from a higher interest rate than you would from an easy access account. That said, you can’t normally withdraw your savings until the end of the term. Alternatively, providers may charge a fee for accessing your savings early.
Once your fixed-term account matures it’s important to decide what you will do with the funds. If you do nothing, you could miss opportunities to grow your wealth.
This is a problem that may be likely to affect you in the future as MoneyAge reports that approximately 70% of fixed-term non-ISA savings accounts are due to mature over the next 12 months.
Read on to learn more.
Only 1 in 10 of the top fixed-term accounts will move your wealth into another fixed-term account on maturity
What happens to your wealth when your fixed-term account matures depends on the provider you hold the account with.
In November 2023, Which? reported that 5 in 10 of the top fixed-term accounts simply paid the funds back into the account that you originally transferred them from.
Meanwhile, 4 out of 10 moved wealth to one of their easy access savings accounts, which would typically carry a lower interest rate.
Alternatively, some providers will automatically put your savings into a new fixed-term account if you don’t withdraw them at the end of the term, meaning your funds could essentially be locked away for another fixed period of time.
Essentially, if you do nothing, your provider decides where your savings should go, and this might not always be the most beneficial option for you.
This could be especially true as interest rates have fallen recently.
Interest rates have fallen on many savings accounts since September 2024
To curb rising inflation, the Bank of England (BoE) increased its base rate 14 consecutive times between December 2021 and August 2023. As a result, cash savings interest rates rose considerably, and you may have capitalised on this by transferring your savings into a higher-interest account.
According to inews, the average interest rate on a one-year fixed-rate ISA was 1.96% in September 2022. A year later, in September 2023, it had risen to 5.19%.
However, the BoE reduced its base rate from 5.25% to 5% in August 2024, and then again to 4.75% on 7 November 2024, after inflation fell below the annual target of 2%.
As a result, banks began reducing their rates and in September 2024, the average interest rate on a one-year fixed-rate ISA was 4.29%.
In comparison, inews reports that the average easy access rate in September 2024 was just 3.07%. As a result, if your provider moves your wealth to an easy access savings account or a different fixed-term, fixed-rate account, you may not generate as much interest as you previously did.
That said, the Office for National Statistics (ONS) reports that inflation increased to 2.3% in the 12 months to October 2024. As a result, interest rates may be less likely to continue falling until inflation falls below the 2% target again.
This could mean that you’re able to find another favourable fixed-rate account now, before interest rates fall again.
Here are three options you could consider.
3 useful options to consider when your fixed-term account matures
1. Search for a new fixed-term account
You may be using bonds or a fixed-term ISA to save for short-term to medium-term goals such as home renovations or a holiday. If you don’t need to access the funds for a while yet, you might decide that you want to put your wealth into another fixed-term account.
However, it’s important that you don’t let your provider automatically move you into a new fixed-term account as they may not offer the most favourable interest rate. Instead, you may want to search for a new account yourself and find the most competitive rates, so you can generate as much growth as possible.
2. Consider investing your wealth instead
When your fixed-term savings mature, you may want to review your goals and consider when you might need to access that wealth. If you don’t need those savings to meet short-term to medium-term goals and want to generate long-term growth, you could consider investing the funds instead.
While past returns from an investment don’t guarantee future performance, the historical data suggests you may see more growth from investing over the long term. This could be a good option if you plan to hold your wealth for a period of five years or more and you are prepared to take a higher level of risk.
Investing could also help you generate returns that beat inflation, which is important if you want your wealth to grow in real terms. Our previous article on why cash savings rates aren’t as attractive as they seem explains how a period of high inflation might erode the real-terms value of your cash savings, and how investing could help you protect your wealth.
3. Make a lump sum pension contribution
If you want to invest for the longer term, you could also consider making a lump sum pension contribution with your savings when your fixed-term account matures.
Provided that you do not exceed the pension Annual Allowance (£60,000 in 2024/25), you will automatically benefit from 20% tax relief on the contribution. You could claim an extra 20% or 25% through self-assessment if you’re a higher-rate or additional-rate taxpayer.
Remember, funds placed in a pension will normally be invested and could benefit from compound growth over a period of years. Consequently, your contribution could be more valuable than it would be if you left your wealth in a savings account.
Bear in mind that you typically won’t be able to access your pension savings until you’re 55 (rising to 57 in 2028), therefore, the timing to access these funds is also an important consideration.
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Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term (minimum of 5 years) and should fit in with your overall risk profile and financial circumstances.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
