Further falls from a low base
Egg has cut the rate on its Savings Account (Issue 2) from a joint market-leading 2.80% to 2.50%. Government-backed National Savings & Investments also announced it was lopping 0.25% off its Direct Saver and Income Bonds with immediate effect. At the same time, NS&I also withdrew its Fixed Interest and Index-linked Savings Certificates from the shelves completely.
These savings providers are hot on the heels of Alliance & Leicester, which withdrew its top-of-the-tables Online Saver Issue 7 account (which paid 2.81% for the first year) a few weeks back. And fears are mounting that other savings providers could soon follow suit by either edging down or withdrawing rates on easy access accounts.
Kevin Mountford, moneysupermarket.com’s head of banking, explained: “Savings providers are quite tactical when it comes to the interest rates they offer, which are related to much more than the base rate. They want to pull in just the amount of cash they need and control the flow by adjusting interest rates. This means that ‘top of the tables’ is not necessarily a space they want to occupy all of the time.”
Time to fix in
Now could be the perfect time for casual savers with easy access accounts, to start changing tack with their cash. Just as the easy access market becomes less competitive, things are picking up in the fixed rate bond arena. So if you have savings you can afford to lock away for the next 12 months or more, why not consider a fixed rate bond instead?
Kevin said: “Previously, there was little difference between easy access account rates and those payable on one-year fixed rate bonds, which meant there was little point in relinquishing the flexibility of accessing your cash. But now easy access rates are falling, the disparity between rates on these different types of account is growing, which means locking your savings away, even for a short while, is looking more and more attractive.”
What’s more, the entrance of new players into the savings market, such as Indian Bank of Baroda – which offers some exclusive, best-buy deals with moneysupermarket.com – is really upping the ante in the fixed rate bond market and this could push rates even higher.
The best fixed rate bonds
If you are convinced about locking away your savings for a year, you will want to be sure your cash is working as hard as possible – which means seeking out the best deals. Providing you can stump up a £500 minimum investment, top of the tables is Bank of Baroda which is offering a 12-month fixed rate bond payable at 3.15%.
The deal is closely followed by rival Indian bank ICICI that is offering a rate of 3.10% over the same term on balances of £1,000 or more with its HiSAVE Fixed Rate account.
There is no need to worry about security of your cash with either of these overseas banks as both are fully regulated under the Financial Services Compensation Scheme (FSCS). This means that the first £50,000 of your cash is fully protected (£100,000 if the account is in joint names).
The longer you can afford to relinquish access to your savings for, the higher the returns on offer. Bank of Baroda is also offering the best deals on fixed rate bonds of two and three years at rates of 3.8% and 4.3% respectively. In both cases you will need an initial £500 stake to open the account.
Alternatively, Santander is offering a rate of 3.75% on its two-year fixed rate bond, although the minimum investment is higher at £10,000.
If you can only muster a small savings deposit, try Cheshire Building Society’s two-year fixed rate bond, payable at 3.6% in exchange for £100. For the same stake, the savings provider also offers a three-year version priced at 4.11%.
Even if you only want to start with a £1 investment, there are still some competitive rates in the offing. The AA offers a three-year bond with a fixed rate of 4.10% for £1, while Nationwide and BM Savings both offer rates of 4.15% on their four-year bonds.
Five-year bonds pay the best rates of all, with Bank of Baroda sitting top of the tables again paying a rate of 4.9% on a £500 balance. Bear in mind though that interest rates are still at unprecedented lows, so it could be best to hold off for a while before locking up your cash for this long.
Finding a compromise
If you are new to fixed rate bonds and nervous about putting a padlock on your money, there are ways and means of just dipping a toe in the water. The obvious solution is to lock just some of your savings away in a fixed rate bond, while keeping a chunk back in a competitive easy access account.
Alternatively you could take a slightly bigger plunge and opt for a six-month fixed rate bond. In return for £1, Nationwide is offering 2.01% on savings for this period. You never know, it could be the start of a very healthy habit.