Should I lock my savings in to an account paying 3.8%?

I’ve spotted a savings account offering 3.8 per cent interest, which is the highest rate that I’ve seen for years. 

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

Should I go for it, pick an account with a shorter term or hold out for one that’s even better? L.W., York 

Ruth Jackson-Kirby replies: Savers are finally being offered some of the best interest rates for more than a decade, after years of pitiful returns. 

The improvement to rates is largely down to the Bank of England lifting the base rate to deal with inflation. The base rate is the benchmark from which banks set their own interest rates on savings and loans. 

You are quite right that a rate of 3.8 per cent is now being offered by Hampshire Trust Bank – the highest savings rate available at the time of going to press. 

But that doesn’t mean you should necessarily rush to lock into this or another top-paying account. 

Firstly, this account requires you to lock your money away for three years. Experts believe that interest rates will continue to rise over the next few months, so locking in to this, or another multi-year deal, could mean you get left behind. 

Anna Bowes, the co-founder of Savings Champion, says: ‘I cannot say for sure what is likely to happen to savings rates over the next few months and years. But there are indications that there will be further base rate rises, which will push up savings rates even more – including for fixed-rate bonds.’ 

The issue with putting your money into a fixed-rate account for a number of years is that it really is locked away. If you want to access your money early, you will usually pay a penalty that wipes out the higher rate that initially attracted you to 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 a rate that is nearly as high, but with a much shorter term. For example, the best-buy one-year fixed-rate account is 3.4 per cent from Charter Savings Bank, not much lower than the 3.8 per cent best-buy three-year fix. Opt for a two-year fixed-rate bond from Charter Savings Bank and you could get 3.7 per cent. 

While higher interest rates are of course good news, there is not a single account that gets anywhere near to beating inflation. 

Inflation is currently 9.9 per cent, as measured by the Consumer Prices Index (CPI). That means that if you have £1,000 in cash, it will have the spending power equivalent to just £901 after a year. 

But if you put your £1,000 in a savings account paying 3.4 per cent, it will have the spending power of £932 after a year – an improvement on holding cash, but still a significant loss in value. 

To stand a better chance of taking on inflation, you would need to invest your savings. If you don’t need to spend it for at least five years and are comfortable with taking on some risk, this could be a good option. 

However, bear in mind that you could end up losing money and financial markets are volatile at the moment so you would need to be able to ride the rises and falls. 

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

The best instant-access savings account is paying 2.1 per cent from Al Rayan Bank. You can get 2.52 per cent from BLME if you are prepared to give 90 days’ notice before you withdraw your money. 

Finally, if you are interested in investing, but nervous about the current volatility, you could drip-feed a small amount of your savings into an investment account every month. 

Most investing platforms allow you to set up a direct debit for around £25 a month. That way, you don’t risk investing all of your money just before a market fall.