Fix your savings for a higher return

Published:
24 January 2013
Topic:
News,Money,Savings

After weeks of plummeting savings rates, savers finally had something to celebrate this week after several providers raised rates on their fixed rate bonds.

Shawbrook Bank, for example, has hiked rates on the latest issues of its 3 and 5 year fixed rate bonds by up to 0.35%. Its 5 year bond now pays an annual equivalent rate (AER) of 3.10% on a minimum investment of £5,000, while the 3 year bond pays a respectable 2.95% AER on the same minimum investment.

Meanwhile, Sainsbury's Bank has bumped up the interest paid on its 5 year Fixed Rate Bond by 0.20%, so that it now pays 2.65% AER on a minimum investment of £5,000.

Here, we offer a round-up of the best fixed rate deals currently available depending on how long you want to tie up your savings... .

Top short-term bonds

Many people prefer to go for 1 or 2 year fixed rate bonds, as they don't have to lock up their money for several years, but can still enjoy the certainty that their savings rate won't change during the fixed rate period.

If you among those looking for a shorter-term bond, Bank of Baroda's 1 year Fixed Rate Bond, which is exclusive to MoneySupermarket, pays a market-leading 2.30% AER on a minimum investment of £500.

It is worth noting that BM Savings Online Extra Issue 3 account, which is easy access, pays a higher 2.35% AER. This rate is only available on balances of £50,000, but if you have this amount to invest this account may be a better option if you think you may need to make withdrawals.

However, unlike the Baroda fixed rate account, the rate on the BM Savings account is not guaranteed for a year. 

United Bank UK's 1 year Fixed Term Deposit account is also worth a look, paying 2.25% on a minimum investment of £2,000. Alternatively, if you only have a small sum to invest, Issue 35 of Virgin's 1 year Fixed Rate Bond pays 2.25% AER on a minimum investment of £1.

Rates are even higher if you are prepared to tie up your money for two years. Saga, for example, pays a generous 2.65% AER on its 2 year Fixed Rate Bond, which can be opened with a minimum investment of just £1. However, you do need to be aged 50 or over to be eligible for this account.

Younger savers may instead prefer to consider Vanquis Bank's 2 year Fixed Rate Bond, which pays 2.51% AER on a minimum investment of £1,000. This account is likely to appeal to those who are looking to supplement their income, as savers can choose to receive interest monthly rather than annually if they prefer. However, if you are content with returns paid on maturity of the bond, FirstSave offers 2.75% AER also on £1,000.

Best medium and longer term fixed rate bonds

If you are happy to lock up your savings for three to five years, there are plenty of competitive deals available, several of which have been launched in the past couple of days.

However, always approach longer-term fixed-rate bonds with caution as while rates look competitive now, they may start to look less appealing if interest rates start to rise in a few years' time.

The current market-leading 3 year bond is First Save's 3 year Fixed Rate Bond, paying 2.95% AER on a minimum investment of £1,000. Vanquis Bank's 3 year Fixed Rate Bond now pays 2.86% AER on the same minimum investment, up from its previous 2.76%.

Other competitive 3 year fixed rate accounts include the AA's three-year Fixed Rate Savings account, paying 2.80% AER. However, you need a hefty £50,000 minimum deposit to qualify for this rate, otherwise you will earn a lower rate of interest. If you don't have this much to invest, United Bank UK's 3 year Fixed Term Deposit account pays 2.45% AER on a minimum investment of £2,000.

Five-year terms

For savers who are prepared to tie up their savings for longer than 3 years, the market-leading bond over five years is the aforementioned Shawbrook Bank 5 Year Fixed Rate Bond, paying 3.10% AER on a minimum investment of £5,000.

Another option well worth considering is First Save's 5 Year bond. This account can be opened with a minimum investment of £1,000 and pays a generous 3.01% AER. The maximum amount you can invest is £250,000, but if you are planning on investing a large lump sum, remember that only the first £85,000 is protected under the Financial Services Compensation Scheme (FSCS). 

BM Savings 5 Year Fixed Rate Bond similarly pays a competitive 3.00% but you'll need a minimum investment of £50,000. Balances of £10,000 earn a lower rate of 2.60%. Unusually for a fixed rate account this bond allows withdrawals during the fixed term, but charges apply each time you take money out.

Fixed rate ISAs

If you have yet to use this year's individual savings account allowance (ISA) and are considering a fixed rate bond, you may want to invest in a fixed rate ISA, as returns are tax-free. You can invest up to £5,640 into a cash ISA this tax year, and the same amount in stocks and shares, or you can invest the full £11,280 allowance in stocks and shares alone.

If you haven't used your allowance by April 5, this year it will be gone forever.

For savers looking to use their allowance and transfer money held in existing ISAs, BM Savings 3 Year Fixed Rate ISA pays a market-leading 2.80% tax-free on balances of £50,000. This drops to 2.40% if you have a minimum deposit of £10,000. 

Halifax's ISA Saver Fixed account meanwhile, pays 2.40% tax free for three years on a minimum deposit of £500.

Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.

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About This Author

Melanie Wright

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Financial journalist

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