Should I block my savings on an account paying 3.8%?

I spotted a savings account offering 3.8% interest, which is the highest rate I’ve seen in years – should I go?

Hard-earned: Should our reader lock in their savings to an account that pays 3.8%?

I spotted a savings account offering 3.8% interest, the highest rate I’ve seen in years.

However, I would have to freeze my money for three years.

Should I go for it, choose an account with a shorter duration or wait for an even better account? LW, York

Ruth Jackson-Kirby responds: Savers are finally being offered some of the best interest rates in over a decade, after years of dismal returns.

The improvement in rates is largely due to the Bank of England raising the base rate to keep up with inflation. The base rate is the reference from which banks set their own interest rates on savings and loans.

You are absolutely right that a rate of 3.8% is now offered by Hampshire Trust Bank – the highest savings rate available at the time of printing.

But that doesn’t mean you have to necessarily rush to lock that or another high-paying account.

First, this account requires you to lock your money for three years. Experts believe that interest rates will continue to rise over the next few months, so locking yourself into this deal, or another multi-year deal, could mean you get left behind. Anna Bowes, co-founder of Savings Champion, says, “I can’t say for sure what will happen to savings rates over the next few months and years. But there are indications that there will be further base rate hikes, pushing savings rates even higher – including for fixed rate bonds.

The problem with putting your money in a fixed rate account for a number of years is that it really gets locked in. If you want to access your money sooner, you’ll usually pay a penalty that will undo the higher rate that originally lured you into the account.

In some cases, you simply cannot withdraw your money unless you have a very good reason, such as being diagnosed with a terminal illness.

You may be able to get almost as high a rate, but with a much shorter duration. For example, the best one-year fixed rate account is 3.4% from Charter Savings Bank, which isn’t much lower than the best three-year fixed rate of 3.8 %. Go for a two-year fixed rate bond from Charter Savings Bank and you could get 3.7%.

While higher interest rates are of course good news, there isn’t a single account that comes close to beating inflation.

Inflation is currently at 9.9%, as measured by the Consumer Price Index (CPI). This means that if you have £1,000 in cash, it will have purchasing power equivalent to just £901 after one year. But if you put your £1,000 into a savings account paying 3.4% it will have purchasing power of £932 after a year – an improvement over holding cash, but still a loss in value significant.

To have a better chance of fighting inflation, you need to invest your savings. If you don’t need to spend it for at least five years and are comfortable taking risks, this might be a good option.

However, keep in mind that you could end up losing money and financial markets are volatile at the moment, so you will need to be able to ride out the ups and downs.

You may find that a compromise offers the best solution. You could put some of your savings in a one- or two-year fixed rate account to get one of the best rates. Then you can put the rest into an easy-to-access account ready to take advantage of even better rates if they appear.

The best instant access savings account pays 2.1% from Al Rayan Bank. You can get 2.52% BLME if you are willing to give 90 days notice before withdrawing your money.

Finally, if you want to invest, but are worried about the current volatility, you can deposit a small part of your savings each month into an investment account.

Most investment platforms allow you to set up direct debit for around £25 per month. This way, you don’t risk investing all your money just before the market drops.

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