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Savers approaching the end of their fixed-rate bond deals face income drops of more than 50 per cent, it has emerged. 

Interest rates paid on one and two-year bonds have tumbled since they were first taken out.

A year ago, the average rate on one-year bonds for new savers was 1.62 per cent. Today it is 1.19 per cent – a 27 per cent drop.

 

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The rate falls are largely in part due to the Bank of England Funding for Lending Scheme, launched in 2012. It offered money at a rock-bottom rate to banks and building societies to lend as mortgages – so they no longer relied on wooing savers.

Although the scheme is officially closed, lenders still have billions of pounds earmarked that they can call on until the end of January next year.

As well as a Bank of England base rate at 0.5 per cent, fear of attracting waves of customer cash by topping the best-buy tables is stifling competition.  

Rates for fixed-rate deals are so rotten – especially on the High Street – that savers usually should consider an easy-access account instead.

Traditionally, regardless of market conditions, fixed-rate bonds pay more than accounts where you can take your money out at any time.

This is because the bank or building society usually pays a premium for you leaving your money untouched for a year or more.

But this has been turned on its head by some of the big High Street names.

For one-year fixes, Barclays, Lloyds, HSBC, NatWest, RBS and TSB all now pay less than 1.25 per cent. Among the worst rates over 12 months are HSBC at 1 per cent and NatWest, Santander and TSB at 1.1 per cent.

This is less than the top easy-access account rates of 1.35 per cent on offer from supermarket bank Sainsbury’s Bank eSaver Special or Coventry BS PostSave at 1.4 per cent.

With the Sainsbury’s account you earn £108 interest after tax on every £10,000 saved. But HSBC will pay you just £80 in its one-year fixed rate bond. And with interest rates expected to start rising next spring, there is the chance you can then switch from your easy-access account to a better one-year deal.

You can’t usually do that with a fixed-rate bond as you are locked in for 12 months. Or if the bank allows it, you will usually have to pay a fee equal to at least three months’ interest.

Other easy-access accounts comfortably beat the bank’s fixed-rate deals. Virgin Easy Access Issue 12 pays 1.3 per cent and Britannia Select Saver 6 offers 1.4 per cent – although this latter account limits you to four withdrawals a year.

If you still want to tie up your money for a year rather than enjoy the benefits of an easy-access account, smaller companies offer much more generous rates.

Last week, Yorkshire BS launched a top-paying one-year fixed-rate deal at 2 per cent. It is also available at its offshoots Chelsea, Norwich & Peterborough and Barnsley building societies.

The offer looks a good deal as rates on easy-access accounts are unlikely to reach this level in the next 12 months. And in a boon for Isa savers, it is also available as a cash Isa paying 2 per cent.

But if you are prepared to introduce some risk to your capital you could end up with the best of both worlds. Instant access and the potential for returns greater than those available from traditional deposit based savings.

balance sheet integrity - a risk based approach
 
You should only commit to this type of strategy if you have capital that you have no immediate use for, and you are prepared to see some fluctuations both up and down during the time you hold the investment.
 
If you want to know more about making your capital work harder for you over the coming years you can arrange an appointment with one of our independent financial advisers.
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