The savings tactic that gives you high returns (even when interest rates fall)

Savings rates appear to have peaked and are on the way down, having offered well over 6pc interest last summer. 

If your money isn’t already locked up in a high-interest savings account, now is the time to start making moves to prevent your cash stagnating if rates continue to fall.

While some savers will be more than happy to lock away their full sum of savings for a year or two in whichever account pays the most, anyone who’s worried they might need to access some cash during that time, or who’s nervous about missing better rates in future, might be hesitant to press the “save” button.

However, one tactic that sees savers make the most of the highest-available interest rates while also investing in longer-term fixes could offer some much-needed stability.

The “laddering” technique involves a saver splitting their lump sum across a variety of accounts on a number of different fixes, where one fix matures every year. 

Once that account matures, you could spend some of it, or put it straight into another fix. 

Usually, the highest rates on the market are offered by long-term fixes (commonly five years), so the eventual aim is to have a rotation of five five-year fixes, with one maturing every year. 

Sarah Coles, of investment platform Hargreaves Lansdown, said: “Laddering is a great way to maximise your interest, while ensuring you have access to a lump sum each year. 

“At the moment it’s less effective at boosting interest, because the inverted yield curve means you’ll earn less over five years than you do over one. 

“However, if you fixed it all for a year, you could end up facing a far less rewarding rate when you emerged, so laddering mitigates this risk.”

Here, Telegraph Money explains how this way of saving works, and how much interest you could expect to make over a five-year period.

How does savings account ‘laddering’ work?

While it may not beat inflation, this savings technique allows savers to make the most of some of the best rates available right now, and the certainty of longer-term accounts. 

This could prove to be particularly important right now, as inflation looks to have peaked and be on its way down. 

The Bank Rate also looks to have peaked at 5.25pc – where it has been held since August 2023. Before recent inflation reductions it had been expected to peak around 6pc.

That being said, it’s still unclear when the Bank Rate will start to drop – but many mortgage lenders and savings providers have already started to price in assumed rate cuts into their interest rates.

The good news is, hundreds of savings accounts are offering inflation-busting rates, which measured 3.9pc in November, according to the Office for National Statistics. Many fixed-term accounts are still offering rates well over 5pc.

By opening a one-year fix, a two-year fix, a three-year fix, a four-year fix and a five-year fix, savers can ensure that they have both liquidity and strong interest payments. 

Telegraph analysis found that, at current rates, savers could earn £1,280.45 in interest payments on five £1,000 pots over a five year period. 

This is assuming investments of £1,000 are made into pots at a rate of 5.5pc for the one-year fix, 5.25pc for a two-year fix, a three-year fix at 5.35pc, a 4.6pc for four and a 4.75pc over five, and assuming that when accounts mature savers reinvest into a five-year fix at 4pc. 

If a saver can increase the pots to £5,000, they can earn up to £6,302 in interest payments over the five-year time frame. 

In the first year, the five pots will earn £1,274, falling slightly to £1,257 in the second year and £1,260 in the third. By year four, interest payments will total £1,247 and in the fifth year the earnings will be £1,264. 

Rachel Springall, Finance Expert at Moneyfacts, said savers should move quickly to secure high short-term fixes. 

“This area of the market is brimming with challenger banks, and they traditionally move quickly to attract deposits to fund their future lending. Savers will have to move quickly to grab a top rate from such a volatile market.”

It’s not necessary to put the same amount of money in each pot, and when accounts mature you can also choose whether to reinvest in short or long-term fixes, depending on your personal preference, and what’s happening with interest rates at the time. 

If a saver continues to open five-year fixes, eventually they will be in a position where they have a long-term account maturing every year. 

This technique has been recommended in the past as a way for savers to retain access to their money while making the most of the better rates offered by longer-term fixes. 

However, because the long-term forecasts are currently unstable, it initially seems more lucrative to put money in shorter-term fixes at slightly higher rates. 

James Blower, an expert from Savings Guru, said recent inflation news could mean savings rates are past their peak, although shorter term loans are likely to remain lucrative over the next couple of years. 

“Forecasts are still that shorter term fixed pricing will remain higher for the next couple of years. 

“Spreading across terms enables savers to lock in to good rates now, particularly longer term ones which look overpriced (to savers) but retain access to some shorter term fixed rate monies where they may have a chance to fix at good rates in one and two years time.”

Watch out for a savings tax bill

Wealthy savers should be wary of passing the tax-free personal savings allowance threshold, which stands at £1,000 for basic-rate taxpayers, and just £500 for those who pay higher-rate tax. 

Additional rate taxpayers – those earning more than £125,000 – are not entitled to a savings allowance.  

Savers who haven’t used their Isa allowance can protect their interest payments by using a laddering scheme within the tax-free wrapper, depositing up to £20,000 each tax year. 

This article was first published on July 22, 2023, and has since been updated.