Bond, Savings Bond: Tied into more than a quantum of higher interest

Banks desperate for funds amid the credit crunch are offering higher and higher rates on savings bonds. Stock market falls have also increased demand for safe havens for cash.

But is it worth it tying yourself in so firmly, when some notice savings accounts can compete for price?

Currently the continuing squeeze on interbank lending means banks are turning to consumers for cash so they can carry on lending. Taking people's cash in bonds means the lenders now they have liquidity for a longer time, so they are willing to pay extra.

Janet Cane, savings analyst at Moneyfacts.co.uk, explains: "Many providers have realised that there is no more new money in the market and that the only way to increase their balance sheet is to tempt savers’ money from their competitors.

“The continuing deterioration of the mortgage market which has left many lenders struggling to obtain funds on the money markets. The savings market in comparison is flourishing thanks to some of the highest levels of interest rates on savings accounts seen in years, particularly compared to times when base rate was at the same level.

“In the last month the highest rates on offer in the best buy charts have started to recede slightly but some providers are still launching products with extremely competitive rates."

Data from Moneyfacts show the current best buy long-term fixed rate bonds are all over seven per cent – ranging from FirstSave's two- and three-year bonds at 7.10 per cent to Icesave's bonds at 7.06 per cent and Stroud & Swindon's 7.05 per cent.

ICICI Bank UK's 12-month bond is at 7.20 per cent, while FirstSave, IceSave, Anglo Irish, Post Office and cahoot all have year bonds over seven per cent.

However savers should be reminded the first stop should be an ISA – so your savings can bypass the taxman.

Britannia and Bradford & Bingley have ISAs at 6.30 per cent and 6.25 per cent.

Jason Clarke, at Skipton Building Society, says: "An ISA should be the first port of call for savers and fixed ISAs are popular with a range of people."

But can the bonds compare with savings accounts?

The key – generally – is the less access you are prepared to have to cash the higher the interest rate.

Bonds tie you in firmly for a fixed period with no access, with the penalty of losing all interest.

As much as three month's notice can be required to withdraw from these accounts – or you could lose a month or more of interest.

Here we find the best rates on the market differ little between those offering easy access and those not.

However, you should be aware about the bottom of the market as well as the top.
Research by MoneyExpert.com shows the average instant access savings account now stands at just 3.3 per cent.

Who are bonds for?

"By and large people going for bonds are older customers looking at somewhere to look after their money," explains Mr Clarke at Skipton.

"The profile is largely those over 35s and have a high income."

But the recent volatility in the stock markets has increased the desire for bonds.

"Bonds can be fixed between three months and five years and allows people burnt by the stock market to get a decent return and no risk," he says.

He explains those looking for bonds generally have investments in equities, but are looking for somewhere safe to store cash.

Generally people have half of their investments in equities and half in cash.

Mr Clarke explains: "People are told to keep two month's income worth of savings with easy access. Anything else can be tied up for longer."

Bonds v Savings accounts

Currently the best rates on bonds are beaten by regular saver accounts.

On the face of it, savers are locked into saving as with bonds, but the headline rates are higher.

The best regular saver account on the market – at Darlington Building Society – offers eight per cent compared with the best bond at 7.20 per cent.

However, it pays to remember bonds and regular savings are quite different products. With a bond it is possible to put away a lump sum at the beginning of the term and be guaranteed a fixed return.

Meanwhile, regular saver accounts limit the amount of monthly contributions and are really designed to get you saving each month and building up to that lump sum. As regular saver accounts often only last for a year high annual rates only really apply on the first contribution.

For example if a bank was offering an annual regular savings rate of 12 per cent, the rate on the second contribution in month two would be 11 per cent and so forth.

Best buys for bonds

Savings – Short Term Fixed Rate Bonds. (Source Moneyfacts.co.uk)

	Account	Gross	AER	Notice or Term	Deposit
ICICI Bank	HiSAVE Fixed Rate (without early access)	7.20%	7.20%	12-month bond	£1,000
FirstSave	Fixed Rate Bond	7.10%	7.10%	12-month bond	£1,000
Icesave	Fixed Rate Savings	7.06%	7.06%	1 year bond	£1,000
Anglo Irish Bank	Fixed Rate Bond	7.05%	7.05%	1 Year Bond	£500
Post Office	1 Year Growth Bond 6a	7.05%	7.05%	1 Year bond	£500
cahoot	12 Month Bond	7.01%	7.03%	16/07/09	£1,000

Savings – Long term Fixed Rate Bonds (Source Moneyfacts.co.uk)

	Account	Gross	AER	Notice or Term	Deposit
FirstSave	Fixed Rate Bond (without early access)	7.10%	7.10%	2 year bond	£1,000
FirstSave	Fixed Rate Bond	7.10%	7.10%	3 year bond	£1,000
Icesave	Fixed Rate Savings	7.06%	7.06%	2 year bond	£1,000
Icesave	Fixed Rate Savings	7.06%	7.06%	3 year bond	£1,000
Stroud & Swindon BS	Ebond Issue 3	7.05%	7.05%	17.08.10	£2,000
Anglo Irish Bank	Fixed Rate Bond	7.00%	7.00%	2 Year Bond	£500

Savings – Regular Savings (Source Moneyfacts.co.uk)

	Account	Gross	AER	Min deposit per month	Max deposit per month
Darlington BS	Monthly Supersaver	8.00%	8.00%	£50	£250
Barclays Bank	Monthly Savings	7.49%	7.75%	£20	£250
Abbey	Fixed Monthly Saver 7	7.25%	7.23%	£20	£250
Principality BS	Regular Saver Bond 5	7.00%	7.00%	£20	£250
Skipton BS	Special Saver	6.80%	6.80%	£10	£250
Skipton BS	Christmas Saver Iss 2	6.80%	6.97%	£10	£250