Little-known ‘laddering’ trick that could make you hundreds from savings – and the traps to avoid 

SAVVY savers are locking their money away to take advantage of high interest rates.

Despite the cost-of-living crisis, savers poured £23.4billion into fixed-term savings accounts between July and September, according to figures from the Bank of England.

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This was up £15billion compared with the same period last year.

Money kept in fixed-term savings is locked away for a set period of time, but you tend to get a higher interest rate than with more flexible access accounts.

The best fixed deals now pay almost six per cent interest compared to around four per cent this time last year and just 0.9 per cent in 2021, according to finance data company Moneyfacts.

Usually longer-term fixes pay more than short-term options.

But as interest rates are thought to have more or less peaked, there is little difference between the best one-year and five-year rates.

If rates fall as expected over the coming years, locking into a longer deal now could earn a lot more than fixing for a shorter period.

But many households can’t afford to lose access to all their savings for five years.

To make the most of high returns while keeping some cash free, a new “laddering” savings strategy is gaining popularity, as we explain.

What is laddering?

IT is a strategy where you divide your money across several savings accounts with different fixed terms.

For example, you might spread your savings across five accounts, with one-year, two-year, three-year, four-year and five-year fixed terms.

This way, you’re still taking advantage of the best deals while keeping a steady flow of cash coming in over the next few years.

When each deal comes to an end, you can choose to withdraw the cash or reinvest it in the best deal at the time.

Myron Jobson, senior personal finance analyst at investment service company Interactive Investor, says: “Interest rates are moving very quickly at the moment and they aren’t expected to climb much, if at all, in the near future.

“The laddering strategy means you can get these top deals without tying up all your money at once.”

The best rate now for a one-year fixed term account is 5.91 per cent with Metro Bank, for two years it’s 5.8 per cent, three years 5.9 per cent, four years 5.6 per cent, and five years again 5.6 per cent, all with JN Bank, according to Moneyfacts.

The top deals tend to be from so-called challenger banks — newer banks usually based online — rather than high street lenders.

If you divide a savings pot of £5,000 equally between the best five different length accounts, you could earn £922.71 in interest, according to calculations by Interactive Investor.

Putting £100 into each of those accounts could earn you £92.28 in interest — although some accounts have a minimum deposit, so have a look before you try to open an one.

Check out our graphic, above, to see how it works. We’ve used the highest-rate fixed accounts available at the moment.

Mistakes to avoid

THERE are some common pitfalls to watch out for when hunting for the best returns on cash.

Sarah Coles, head of personal finance at broker Hargreaves Lansdown, says many savers lose out by sticking with their favourite high street banks even when challenger banks are offering far better deals.

She adds: “The thought of the effort involved stops us moving our money, but that inertia is costing us a fortune.

“Don’t be afraid of challenger banks.

“They offer much higher rates to attract new customers.”

Anyone with a larger savings pot should be aware of crossing the tax-free personal savings allowance.

Most savers can earn £1,000 interest tax-free each year, but after that they will have to pay tax at their usual rate.

For higher-rate taxpayers — those earning over £50,000 — this allowance drops to £500.

However, you can avoid handing over a chunk to HMRC by putting your cash in an ISA, as the interest is always tax-free.

Are my savings protected?

THE Financial Services Compensation Scheme protects your money if any UK-authorised bank or building society goes bust.

The scheme will pay up to £85,000 for each firm you hold money with, or £170,000 for joint accounts.

Set a goal to start saving

IF you’re new to saving, start by setting a goal you want to work towards.

It can be much easier to save when you know what you’re aiming for.

Open a dedicated savings account to put money in so you aren’t tempted to spend it.

Set an amount you want to save each week or month, no matter how small. You can always increase it when you’re in the habit of saving.

Putting aside £5 a week adds up to £260 a year, and that will be boosted by any interest paid.

Setting up a direct debit from your current account to your savings account is a good way to ensure you don’t forget.

‘I switched banks to earn five times more interest and £200’

MUM-of-four Heidi Flaherty, 28, switched banks to pocket nearly five times more interest on her savings.

The move also earned her a £200 joining bonus – and she now says switching is her new side hustle that will pay for Christmas.

Heidi, a night shift carer from Norfolk, had been with Lloyds for 14 years and was earning no interest on cash in her current account and only 0.49 per cent from the linked easy-access savings account.

She switched to Nationwide to bag an easy access savings rate of 2.25 per cent, plus five per cent on current account balances up to £1,500 for 12 months.

She says: “I have £20,000 in my savings, which is money for house renovations and a holiday.

“If I keep £1,000 in the current account for a year I will get an extra £50.

“This is on top of the £200 bonus for making the switch.

“Many people ignore interest rates on accounts thinking the amount is meaningless and swapping accounts is hard.

“My only advice is to make sure you read the small print and check for hidden charges.”

This post first appeared on thesun.co.uk