Where to invest a savings lump sum

Almost 600,000 savers with money held in fixed rate bonds will face a rate shock when their accounts mature this month, making it more important than ever to take action and seek out the best available returns.

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Best buy rates on fixed rate bonds and other accounts have fallen sharply over the last few years, leaving those whose bonds finish in the next few weeks facing a ‘savings precipice’.

According to HSBC, more than 5.5 million fixed rate savings accounts worth over £110 billion are set to mature this year, with the highest number, nearly 600,000, coming to an end this month.

Those worst affected are likely to be those who leave their money where it is, as some providers automatically deposit the cash in a default account paying poor rates of interest.

The good news

But it’s not all doom and gloom. While there is no escaping the fact that, with the Bank of England base rate still at a record low of 0.5% finding returns to match those offered a year or more ago is impossible, fixed rate bonds still offer some of the highest savings rates available.

Provided you are able to tie your money up for a further period of time, you are likely to earn considerably more interest by investing in a fixed rate product than if you opt for an easy access account. You must, however, be prepared to sacrifice some flexibility, as you cannot usually make withdrawals during the term of the bond.

Kevin Mountford, head of banking at moneysupermarket.com, said; “Although you are unlikely to find rates as high as was paid four or five years ago, fixed rate bonds continue to give good levels of returns at a time when interest rates are low - the best rate over five years is currently 4.75% and over one year it is 3.1%, compared to the best easy access account which pays 2.8%.”

Whatever you do, don’t leave your money where it is when your bond matures, as the chances are it will be moved into an account with a much lower savings rate, costing you potentially hundreds of pounds in lost interest every year.

For example, the top paying four-year bond in June 2006 was from Cheshire Building Society which paid a competitive 5.28%.

However, if you fail to take action when the bond matures you could see your funds move into an account paying just 0.10%, costing you £518 in lost interest on a £10,000 balance over a year.

Seek out the best deals

The right fixed rate savings bond for you will depend on how long you are prepared to leave your money untouched for.

For savers looking for a short-term fixed rate bond, ICICI Bank’s 1 Year HiSAVE Fixed Rate account pays 3.10% on a minimum investment of £1,000. No additional deposits or withdrawals can be made during the bond’s term, and you can’t close the account early either.

Barnsley Building Society’s 1 Year Fixed Rate Online Bond pays 3.00% on a minimum balance of £100 and, unlike many fixed rate bonds, you can top up the account for as long as it is still available to new investors.

Savers who want to tie up their money for a bit longer may want to consider Nationwide Building Society’s 18 Month e-bond, paying 2.75%. You only need £1 to open this account but, as you can only make a single deposit when you open the account, it is really targeted at those with a lump sum to invest. You have to have a Nationwide FlexAccount to qualify and you will lose 180 days’ interest if you have to close your account early, so make sure you only invest if you don’t need to touch your money for the 18-month term.

Medium term savers

If you’re prepared to leave your lump sum untouched for two years, then you can earn almost an extra percentage point of interest with ICICI Bank’s 2 Year HiSAVE Fixed Rate Account. The bond pays 3.70%, and you need a minimum investment of £1,000. You can’t make additional deposits once you have opened the account, so it is only suitable for those with a lump sum to invest.

Sainsbury’s Finance 2 Year Fixed Rate Saver similarly pays 3.55% annual interest, but you need £5,000 to open this bond, and you cannot pay in any further money or make any withdrawals during the term of the bond.

Three-year fixed term investors will do even better. ICICI Bank’s 3 Year HiSAVE Fixed Rate Account currently pays 4.15% on a minimum investment of £1,000. You can’t make any additional deposits once the account is opened, so again this account is only suitable for lump sum investors.

When the bond matures, unless you request otherwise, your money will be re-invested into another of ICICI’s fixed rate bonds and, as an existing customer, you’ll receive a bonus of 0.05% on the rate available at the time. If you decide not to do this, your money will be transferred into the variable rate HiSave account and you will be free to move it elsewhere if the interest rate isn’t competitive at that time.

Longer term savers

The longer you can tie up your money, the higher the rate of interest you will earn, but it is worth bearing in mind that the Bank of England base rate is widely expected to rise soon. This means that if you are locking into a fixed rate bond for several years, better deals are likely to become available during the term of your bond.

That said, many bonds with terms ranging from four to five years are paying much higher rates of interest than those that are available elsewhere. For example, Aldermore’s 4 Year Fixed Rate Account pays 4.25% on balances of £1,000 or more, while the State Bank of India’s Hi Return Fixed Deposit pays 4.20%, with the same minimum investment.

ICICI Bank’s 4 Year HiSAVE Fixed Rate Account pays 4.15% on a minimum investment of £1,000, while its 5-year Fixed Rate Account pays 4.75%, making it the market leader over this term.

If you haven’t got £1,000 to invest, then Nationwide’s 5 Year e-Bond is paying 4.25% on a minimum balance of £1, but you must have a Nationwide FlexAccount in order to qualify.

Other competitive longer-term bonds include Chelsea Building Society’s 4 Year Fixed  Rate Online Bond, which pays 4.15% annual interest and allows you to make additional deposits while the bond is still open to new investors.

Doing nothing is not an option...

Wherever you decide to invest the proceeds from your maturing fixed rate bond, don’t leave it where it is unless you have checked you can’t get a higher rate of interest elsewhere.

In these cash-strapped times, it is vital to ensure that you maximise returns on your savings, and there are plenty of good deals around which can help you do this.


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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