How does a recession affect savings accounts?

It should come as a surprise to nobody in the UK that due to the current economic climate, and no light as yet at the end of the tunnel, people are putting aside less in savings than ever before. Even those who were regular savers are finding that they are putting less away for a rainy day than ever before, as this recession is far reaching and affecting most of us in a way that can only be described as detrimental.

For this reason, many who do still have a few pounds to put away are looking at fixed terms saving accounts. The difference between these and other types of savings accounts is that from the outset the saver will know exactly the rate of return that will be achieved on their investment over a set period of time. It is this feature that makes many believe that it is safer to used fixed term savings accounts.

This is effectively a risk free savings option that is proving to be highly popular with those savers who don’t want to take any risks with their money and want to know in advance the rate of interest that they will achieve on their savings. This is a safety net against the Bank of England’s interest base rate changes, which will affect the amount of interest your investment will accumulate.

The base rate has been at 0.5% for an unprecedented length of time now, and this is often confused with the actual interest rate that you receive from your savings account as it is actually a completely different commodity. The base rate is what the Bank of England charges financial institutions to borrow from them, and the less these pay to the BofE the better as they can pass on the savings to customers by giving them a higher rate of interest on their investment.

The main drawback of a fixed term savings account is that, in the majority of cases, you will be unable to withdraw any funds from your account. For some, however, they see this is as the biggest bonus as the fact they can’t get access to it means they can’t dip into it and therefore build the nest egg they are looking for over the time period they have decided on.

The longer you choose to take the plan over the better interest rate you are likely to receive too, so if you don’t want the money for anything special and simply want to build up a lump sum for your retirement for example, these fixed term savings accounts are a very good idea. Those who want to save for a short term, such as saving for a wedding in 3 years time, should compare this kind of account with an ISA to see what offers the best deal.

Whichever way you look at, a fixed term savings plan is a win-win situation even though you won’t see a rise in the interest rate above the rate you have agreed at the outset, you know your money is safe and come the end of the term you will have the sum you wanted.