Looking to fix your savings? A two-year deal is my tip, says SYLVIA MORRIS
One-year fixed rate bonds have been a firm favourite among savers for months.
But a new sweet spot has emerged, and short-sighted savers could miss out on higher returns if they stick with the ever popular one-year staple.
Two-year fixed bonds are the new star of the show, as inflation falls and interest rates are due to drop towards the end of the year.
Lock in now and you are almost guaranteed to beat any one-year deal you will be able to get this time next year, according to the latest forecasts.
Rates on fixed-term bonds have been bobbing up and down for the past week or so but savers can still fix at more than 5 per cent for two years.
RCI Bank has raised its two-year rate to 5.05 per cent, matching that paid by Close Brothers Savings.
Sweet spot: Short-sighted savers could miss out on higher returns if they stick with the ever popular one-year staple rather than two-year -deal
Several — including Atom, Beehive, Hodge Bank, Union Bank of India and SmartSave are just short of the mark at between 4.96 per cent and 4.9 per cent.
If you go for the top one-year bond, you can earn slightly more – 5.18 per cent from SmartSave.
But to beat the 5.05 per cent for two years, you’ll need to lock in at 5 per cent when you come to renew your one-year bond in a year’s time.
And with interest rates expected to fall over the year, it’s doubtful you will find this high a rate.
Until now, savers have understandably been reluctant to tie up money for more than a year.
The cost-of-living crisis has meant we would rather have our money close to hand in easy access accounts or shorter bonds, such as six months to a year.
But thankfully, times of frightfully high inflation appear to be behind us. Annual consumer price rises fell to 3.2 per cent in March from a recent high of 11.1 per cent in October 2022.
The Bank of England has been forced to pump up interest rates in a bid to contain inflation. Its base rate, now at 5.25 per cent, is at its highest for 16 years and has been stuck there since last August.
The theory is if you make borrowing more expensive, people have less money to spend. In turn, this reduces demand for goods and slows price rises.
When inflation falls, the reverse happens and rates typically go down. As inflation edges slowly towards the Bank’s 2 per cent target, money markets are predicting two interest cuts this year with the first happening in the autumn and bringing base rate down 4.75 per cent.
Savings rates will follow.The top two-year bond rates I named above are only on offer for those willing to buy online.
The best High-Street rate sits far lower at 4.4 per cent from Principality or 4.35 per cent from Leeds BS and TSB.
Remember that with a fixed-rate bond, you can’t usually cash it in early — even if you need the money.
If you go for a fixed-term cash Isa you typically can, and all your interest will be tax-free. Isa rules dictate that providers must give you access to your money during the term, although you will pay a fee to get it out — typically the equivalent of six months’ interest.
But rates tend to be lower as there is less competition with fewer banks offering cash Isas. The best rates for two years are offered by Oaknorth (4.62 per cent), Shawbrook (4.61 per cent) and Secure Trust (4.6 per cent).
Green bond comes with a catch
There’s a new savings bond on the block — with a twist.
The Planet Saver, offered by a partnership between green savings group ekko and Bank of London & The Middle East (BLME), allows savers to fund good causes, but only if they are happy to sacrifice some of their interest.
The bond pays two rates — 3.03 per cent for three months or 3.4 per cent for a year, while 1 per cent goes towards environmentally friendly causes.
If you want the top rate, this is not for you. But for each £1,000 in the account, you will be donating £10 a year.
Your money is held by BLME and up to £85,000 is covered by the Financial Services Compensation Scheme.
NS&I early warning on rates is cut
National Savings & Investments is reducing the amount of warning it gives savers before cutting rates, from two months to just two weeks.
The change, which comes into effect from July 1, applies to changes to rates on its Direct Saver, Direct Isa, Junior Isa, Investment Account and Income Bonds.
The move brings NS&I in line with guidelines governing banks and building societies.
These rules from city regulator, the Financial Conduct Authority (FCA), require providers to tell you of the change within a period beginning 14 days before the cut comes in.
Providers can send an earlier warning, but they must send a reminder during that fortnight.
NS&I is not bound by FCA rules but instead by the government. However, HM Treasury expects it to comply with FCA requirements and reflect the standards in the rule book. The change does not apply to Premium Bonds.
The last time the prize fund was cut from 4.65 per cent to 4.4 per cent in the March draw, NS&I announced the change on January 11.
Its customer agreement on Premium Bonds says ‘The prize fund rate, prize values, odds of winning and the way we allocate prizes of each value may change from time to time. Please check our website.’