In this article I explain how to boost the interest you can earn on your savings while maintaining flexibility by not having to lock all of your money away in a 5 year fixed rate savings bond, a type of savings account that usually offers the best interest rates. The trick is to use a strategy referred to as a cash ladder or savings ladder which utilises fixed rate savings bonds in a flexible way.
What is a fixed rate savings bond?
A fixed rate savings bond is a savings account that pays an agreed rate of interest for an agreed period of time, called the term. You may see them referred to as fixed rate savings accounts or fixed rate bonds. Typically, the term of a fixed rate savings bond is between 1 and 5 years. Most fixed rate savings bonds will not allow you to access your money before the term expires. In some instances you are able to withdraw your money early but you will be liable for a penalty fee or you will lose any accrued interest.
Because you must commit to locking your savings away for the agreed fixed term, fixed rate bonds usually offer higher interest rates than can be found on other types of savings accounts. Here you can find our roundup of the best fixed rates savings bonds available, with fixed terms of between 1 and 5 years. This roundup is updated weekly. If you want to ensure your interest is earned tax-free then you should also look at the best fixed rate ISAs, although the interest rates tend to be lower than fixed rate savings bonds outside of an ISA.
Don't forget that you have a personal savings allowance which means that you can earn up to £1,000 in interest tax-free each tax year outside of cash ISAs. While the personal savings allowance for a basic rate (20%) income tax payer is £1,000, it is reduced to £500 for higher rate (40%) income tax payers and is reduced to zero for additional rate (45%) income taxpayers.
How to build a cash savings ladder
The table below summarises the best fixed rate bonds available at the time of publication. The example is used for illustrative purposes so ensure you refer to our fixed rate bonds best-buy table, via the link above, for the current best interest rates.
Example of best interest rates on fixed rate bonds
| Fixed rate bond term | Annual interest rate (ER) |
| 1 year | 4.55% |
| 2 years | 4.76% |
| 3 years | 4.86% |
| 4 years | 4.92% |
| 5 years | 5.01% |
| Average | 4.82% |
Let’s assume that you have sufficient cash held in easy access savings accounts for emergencies and that you have £100,000 you wish to put into longer term savings products in order to earn more interest. If you want to get the maximum amount of interest on your money then you would need to lock your money away for 5 years in order to receive 5.01% interest each year. This equates to £5,010 per annum.
However, if you were to lock your money away for 5 years you would not be able to access it during that period, certainly not without penalty.
Assuming you would prefer to have more flexible access to your savings then a cash savings ladder enables you to get a better interest rate than is available on the typical one or two year fixed rate bond. For example, let's say you took out 5 savings rate bonds, of varying terms, as shown in the table below, each with £20,000 deposited in them.
Example of a cash savings ladder for £100,000
| Product | Amount deposited | Annual interest rate (AER) |
| 1 year fixed rate bond | £20,000 | 4.55% |
| 2 years fixed rate bond | £20,000 | 4.76% |
| 3 years fixed rate bond | £20,000 | 4.86% |
| 4 years fixed rate bond | £20,000 | 4.92% |
| 5 years fixed rate bond | £20,000 | 5.01% |
| £100,000 (total) | 4.82% (average) |
Position at the end of the first year
At the end of year one the1 year savings bond will mature, giving you £20,910 in cash as shown below, while every other savings bond will be one year nearer maturity (i.e. moved one rung up the cash savings ladder) as shown below.
| Fixed term (remaining) | Account value | Annual interest rate (ER) |
| Cash
(from matured 1 year savings bond which will be invested in a new 5 year fixed rate bond) |
£20,910 | n/a |
| original 2 fixed rate bond
(now 1 year from maturity) |
£20,952 | 4.76% |
| original 3 fixed rate bond
(now 2 years from maturity) |
£20,972 | 4.86% |
| original 4 fixed rate bond
(now 3 years from maturity) |
£20,984 | 4.92% |
| original 5 fixed rate bond
(now 4 years from maturity) |
£21,002 | 5.01% |
| £104,820 (total) |
You would then invest the money from the matured bond (a total of £20,910) into a new 5 year savings bond at the best rate that you can find. You then repeat the process each year when the money from the next savings bond matures, investing the proceeds into another 5 year fixed rate savings bond.
The average rate of interest you achieve will be determined by the new rate of interest you can secure each year with the proceeds from the matured bond as well as how much you invest in each product (you don't have to split your money evenly across each one) and how long you carry on using the cash ladder approach. But effectively you will achieve a rate of interest approaching the average of the interest rates achieved across all of the savings products.
Cash savings ladder pros and cons
Pros
- Can earn greater interest than available on easy access savings accounts
- Can access a portion of your money every year (After year 1)
- Allows you to take advantage of new savings accounts with higher interest rates
Cons
- Uses fixed term savings products which means you won’t have access to all of your money at short notice
- A greater administrative burden as you need to open multiple saving products rather than just one (although see section below title "Easiest way to create a cash savings ladder" for how to make a cash ladder quickly online)
- If savings rates fall over time then you will earn less interest than if you’d put your entire lump sum into a 5 year fixed term savings bond at the start
- If you continually use a cash ladder, reinvesting the maturing proceeds each year, then your money could ultimately be locked away for more than 5 years. As a general rule of thumb if you are happy to not have access to your money for at least 5 years then you could get a better return by investing your money into different assets, but you have the potential to also lose money when investing
Alternative cash savings ladder with easy access
If you don’t like the idea of continually locking your money away into 5 year savings bonds and would instead like to have access to all of your money at the end of the initial five year period then you could instead place the proceeds of any maturing bond into an easy access account each year. Currently, the best easy access savings account pays 2.75% interest per annum (see our latest round-up of the best easy access savings accounts). If you took this course of action your £100,000 will eventually turn into £121,903 which is equivalent to an annual interest rate of 4.04% on your entire £100,000 over five years, assuming the same fixed rate bond interest rates used earlier.
The good news is that is that at the end each year the amount in your easy access account will grow (meaning less of your money is locked away). The table below shows how much of your money will be in easy access accounts (including the earned interest) each year and how much will still be locked in savings rate bonds.
Cash ladder with an easy access savings account
| Amount in easy access savings account paying 2.75% a year
(topped up when fixed term bonds mature each year) |
Amount locked in fixed term savings bonds (1-5 year) via traditional cash ladder
(interest between 4.55% and 5.01% a year) |
Total | |
| Start of year 1 | £0 | £100,000 | £100,000 |
| End of year 1 | £20,9010 | £83,910 | £104,820 |
| End of year 2 | £43,434 | £66,062 | £109,496 |
| End of year 3 | £67,689 | £46,259 | £113,948 |
| End of year 4 | £93,786 | £24,319 | £118,106 |
| End of year 5 | £121,903
(achieving an effective interest rate of 4.04% a year) |
£0 | £121,903 |
Easiest & quickest way to create a cash savings ladder
One of the drawbacks of a savings ladder is the administrative burden of creating one. To get the best rate of interest you would need to check out the best Fixed rate bonds or Fixed rate ISAs and open an account with the relevant providers. This can be time-consuming, especially as some of the best deals can only be opened in-branch at a bank or building society. However, the advent of cash savings platforms means that creating a cash ladder is easier than ever. A cash savings platform is a website that gives you access to a wide choice of savings accounts from a range of banks and building societies via a single hub. Using a single login for the savings platform you can open and move money between different fixed rate bonds, with different banks and building societies at a click of a button. Right now, savings platforms such as Hargreaves Lansdown’s Active Savings* and Raisin* are offering some of the best fixed rate bonds in the market. You can find out more about cash savings platforms by reading our article ''Best cash and online savings platforms in the UK''.
If a link has an * beside it this means that it is an affiliated link. If you go via the link, Money to the Masses may receive a small fee which helps keep Money to the Masses free to use. The following link can be used if you do not wish to help Money to the Masses or take advantage of any exclusive offers – Hargreaves Lansdown, Raisin UK.
