Bonds are back with a licence to thrill savers

Published on 31/05/2008 14:33

Banks desperate for funds are offering great fixed rates for your cash, writes Emma Lunn.

THE credit crisis may have hamstrung many consumers, but for Scottish savers it has thrown up some fantastic options, and fixed rate bonds are no exception.

Banks are desperate to attract consumer cash and many have upped their savings rates, especially bonds, as a result. It's now possible to pick up a bond at 7% or more.

Fixed rate bonds are savings products which offer a fixed rate of interest over a defined period. People who like to know exactly how much interest they will earn on their savings often opt for these accounts.

"Regardless of the messages coming from the Bank of England about interest rates remaining flat due to the spectre of inflation, there's more chance of them falling than rising, which makes it a great time for those with spare cash to lock it away," says Kevin Mountford, head of savings at moneysupermarket.com. "Anything above 7% is not to be sniffed at."

Last week Anglo Irish Bank launched a one-year bond paying 6.8% and increased the rate on its two-year bond to 6.5%. Meanwhile, Principality Building Society launched a nine-month bond at 6.9%.

However, the best rates are to be found at foreign banks. The First Bank of Nigeria's Firstsave brand launched a bond paying 7.10% (for either one, two or three years) and Icelandic Bank Landsbanki pays 7.01% on its Icesave one-year fixed savings product. Alliance & Leicester International, the Isle of Man based offshore savings bank, also launched a one-year fixed rate bond at 6.65%.

If you prefer to keep your savings in Scotland the rates are not quite so good. The Royal Bank of Scotland's one-year bond pays 5.3% for balances between 2,500 and 24,999, 5.5% between 25,000 and 49,999 and 5.7% up to 500,000.

Alternatively, rates on instant access accounts are competitive at the moment, although not as high as those on one and two-year bonds. The best instant access rates are to be found on accounts run online. Alliance & Leicester's eSaver and Abbey's instant access saver both pay 6.5% but both include a bonus for the first year and the rate will fall after 12 months. Kaupthing Edge's instant access savings account and Birmingham Midshires' eSaver also pay 6.5% but with no bonus.

"Savings providers are mindful of the risk that easy access presents, as funds can leave as quickly as they arrive," says Mountford. "'Sticky' funds secured via fixed bonds are therefore a huge bonus to banks and building societies."

Some providers, such as Nationwide, only offer their best bonds to existing customers. The building society's top paying bond pays 6.6% but you need to have a FlexAccount to open it. Even then, it's not the best-paying account on the market so Nationwide members would be better off looking elsewhere.

There are other restrictions to watch out for if you're looking for a fixed rate product. Sean Gardner, founder of MoneyExpert.com, points out the pros and cons. "If you're able to have sufficient money in a current account that you can leave other funds untouched for a prolonged period then a fixed rate bond could certainly be a good option," he says.

"Quite obviously the rate will remain unchanged so you'll know exactly how much your money will earn for the period of the deal.

"But if there's a possibility that you may need access to the money within the given period you're likely to be stung for a significant amount of the interest, potentially as much as 180 days' worth on the amount withdrawn. What's more, most fixed rate bonds will require a fairly substantial deposit, usually around the 1,000 mark but sometimes as high as 5,000."

Most best-buy tables tend to only show bonds where the customer is not committed to taking other products from the same provider. But if you're willing to do this there are much higher rates to be found.

Alliance & Leicester, for example, has launched a one-year fixed rate savings account offering an interest rate of 9% gross PA/AER with a minimum investment of 1,000. However, savers must also invest at least 5,000 in Legal & General's Balanced Savings & Investment Plan. But although investors can be sure that their savings will grow to a guaranteed sum at the end of the one-year term, the capital and income in the Portfolio Bond are not guaranteed.

Matt Hall, head of savings and investments at Alliance & Leicester says: "This plan balances the need for a safe haven for short-term savings, whilst providing the opportunity to invest over the longer term for potentially higher returns."

Mountford, however, is cautious about recommending products linked in this way and says some secondary products could be poor value compared with the market-leading propositions they are twinned with.

"Linked accounts can offer good value, but it is important to look at the package as a whole rather than just being seduced by the lead offer," he says.

I look beyond big banks for the best deal

HOWARD Peebles, a pensioner from Glasgow, regularly invests in fixed rate bonds and has a number of bonds from Heritable Bank, writes Emma Lunn.

He says: "I have invested in fixed rate bonds for several years. I would say that if you are retired then you have a forward perspective on your income. In general terms you get higher rates than on normal savings accounts.

"I normally have a fixed rate bond ending every quarter and the bonds are normally for two or three years. Up until next April the average return will be 5.75%, which is higher than the base rate."

He uses newspaper best-buy tables to find the best fixed rate bonds and says the best accounts are often from little-known banks rather than household names.

"The Government guarantees deposits up to 35,000 so as long as you keep below that level in each bank it's okay," he says.