The best savings bonds on the market
Tuesday, 24 January 2012 02:44
By Kate Saines
If you are looking for half decent rate of return on your savings and don’t mind locking your cash away for several years, a savings bond could be the answer.
The brilliance of bonds is they tend to pay higher rates than easy access savings accounts, and if you opt for the fixed-rate variety, you’ll be guaranteed that rate of return for the duration of your bond.
Unfortunately, the problem with bonds is they usually require you to keep your cash stashed away for the entire length of the bond’s term.
Since the longer-term bonds are usually always the ones with the higher interest rates, you might be looking at tying up your savings for four or five years in a bid to earn the best rates on offer.
You’ll find all sorts of bond on the market. Fixed-rate bonds are a straightforward, transparent option, which are great if you don’t like uncertainty and want to know exactly what return you’ll get when the product expires.
David Black, a savings expert at independent financial research firm Defaqto, said: “A fixed-rate bond will currently pay higher rates than equivalent variable rate accounts but remember you won’t benefit from any increase in general interest rates during the fixed-rate term.”
He explained that for a balance of £10,000 rates paid by fixed bonds range from under one per cent to 4.7 per cent with the average offering 3.06 per cent in interest.
If you want something a bit more exciting, with the potential for increased yield, you might want to opt for an inflation-linked bond, or a tracker bond.
Inflation-proofing your savings is a fantastic way of ensuring your money is working at its maximum efficiency as it means the interest you are earning will not be eroded by the cost of living.
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Mr Black said: “Inflation has been significantly higher than the bank base rate for quite a while but there are a number of bonds available that track one of the measures of inflation – the Retail Prices Index (RPI).
“If you want to ensure your savings keep pace with inflation then you should consider one of these products – especially if it can be held within your cash ISA allowance.”
He warned, however, that many economists expect inflation to fall in the short term. This highlights the precarious nature of inflation-linked bonds.
Meanwhile, you can also invest in growth or income bonds – also known as structured products or investment bonds. We move into serious investment territory with these products which offer the potential to earn high returns but are usually linked to the growth of an index such as the FTSE100 and therefore could also mean you lose out if the markets come crashing down when the bond expires.
You’ll need a lump sum to pay into one of these, and terms usually last for five years – although there are some products available with shorter three-year investment periods.
It’s important to remember, however, when investing in a bond that they do not have the same tax benefits as an ISA.
Therefore you would be wise to put your first £10,680 of savings per year into an ISA as you will not pay tax on the interest earned. Remember the maximum you can invest in a cash ISA is £5,340.
Another point to consider when weighing up the pros and cons of savings bonds is for what purpose you will be using the money.
If it’s just a general savings account to help you pay for any emergencies which might crop up, big events or this year’s holiday you might be better off with an instant access account.
This is because savings bonds allow you limited access to your money for the term, you may be penalised heavily if you try to withdraw cash.
But if you have a lump sum of cash which you definitely will not need and which you want to see mature, a bond is likely to provide a good home.
David Black said: “Only deposit money into a fixed-rate bond that you know you won’t need for the fixed rate term because early withdrawals tend to be either expensive – in terms of interest penalty – or not permitted.
There are other factors to consider. You might want to avoid a fixed-rate five-year bond if interest rates look likely to soar over the next few years because a variable rate account might offer you a better deal.
Likewise if you fancy taking advantage of today’s high rate of inflation, you might want to consider a short-term bond to avoid your returns dipping further down the line.
If you are undecided about bonds, remember you do not have to put all your eggs into one basket.
Mr Black added: “Some find it useful to split funds between a fixed-rate bond an instant access savings account.”
Savings bonds available at the moment
Vanquis is offering a five-year bond with a return of 4.65 per cent gross AER. A three-year version is also available with interest at 4.15 per cent AER. Both products are available online only for deposits of between £1,000 and £250,000.
Meanwhile you can achieve a 4.8 per cent rate on a five year bond by taking out the Bank of London and the Middle East (BLME) five year Premier Deposit Account. You’ll need a minimum investment of £50,000, however, to take advantage of this rate.
At the other end of the spectrum the AA is offering a rate of 3.6 per cent on its Internet One Year Fixed Rate Bond. You’ll need just £1 to get this online-only savings plan going.
And if you want a fixed-rate which last for just six months, Nationwide’s six-month fixed-rate eBond will give you a return of 2.41 per cent on your savings. A minimum deposit of £1 is available.
In the mid-term investment ranges, you’ll get a good deal at the Yorkshire and Clydesdale Bank which is offering four per cent interest on its two-year fixed-rate bond. You’ll need £2,000 to invest in this one.
Meanwhile, for deposits of £500 or more Santander is offering a rate of 3.2 per cent AER on its latest two-year fixed-rate bond. If you have £25,000 to invest, you’ll receive interest of 3.7 per cent.
If you’d rather opt for a variable rate, Santander has just launched an account offering 2.7 per cent above the Bank of England base rate.
This one-year bond is available for minimum deposits of £10,000 and currently offers a gross AER of 3.2 per cent.
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