Home Money Are you looking to fix your savings? My advice is a two-year contract, says SYLVIA MORRIS

Are you looking to fix your savings? My advice is a two-year contract, says SYLVIA MORRIS

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Sweet Spot: Short-sighted savers could miss out on higher returns by sticking with the ever-popular one-year rather than two-year base deal.

One-year fixed rate bonds have been favorites among savers for months.

But a new sweet spot has emerged, and short-sighted savers could miss out on higher returns by sticking with the ever-popular one-year basic bond.

Two-year fixed bonds are the new star of the show as inflation falls and interest rates will fall towards the end of the year.

Get it now and you’ll almost certainly beat any one-year deal you can get this time next year, according to the latest forecasts.

Fixed-term bond rates have been going up and down over the past week, but savers can still lock them in 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 by sticking with the ever-popular one-year rather than two-year base deal.

Several, including Atom, Beehive, Hodge Bank, Union Bank of India and SmartSave, are just shy of the mark, between 4.96 and 4.9 per cent.

If you opt for the bonus over one year, you can earn a little more: 5.18 percent with SmartSave.

But to beat 5.05 percent over two years, you’ll need to lock in 5 percent when you renew your one-year bond a year from now.

And since interest rates are expected to fall throughout the year, it’s doubtful you’ll find a rate that high.

Until now, savers have understandably been reluctant to tie up money for more than a year.

The cost of living crisis has meant that we prefer to keep our money on hand in easy-to-access accounts or in shorter bonds, such as six months to a year.

But fortunately, the times of terribly high inflation seem to be behind us. Annual consumer price increases fell to 3.2 percent in March from a recent high of 11.1 percent in October 2022.

The Bank of England has been forced to raise interest rates in a bid to contain inflation. Its base rate, now at 5.25 percent, is at its highest level in 16 years and has been stuck there since last August.

The theory is that if borrowing becomes more expensive, people will have less money to spend. In turn, this reduces demand for goods and slows price increases.

When inflation falls, the opposite happens and rates typically go down. As inflation slowly approaches the Bank’s 2 percent target, money markets predict two interest cuts this year; the first of these will occur in the fall and will reduce the base rate to 4.75 percent.

Savings rates will follow. The top two-year bond rates I mentioned above are only offered to those who wish to purchase online.

The best High Street rate is much lower: 4.4 per cent in the Principality or 4.35 per cent in Leeds BS and TSB.

Remember that with a fixed rate bond, you generally can’t cash it out early, even if you need the money.

If you opt for a term cash Isa, you will usually be able to do this 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 withdraw it, usually the equivalent of six months’ interest.

But rates tend to be lower as there is less competition and fewer banks offer cash Isas. The best two-year rates are offered by Oaknorth (4.62 per cent), Shawbrook (4.61 per cent) and Secure Trust (4.6 per cent).

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The green bond has a drawback

There is a new savings bond on the market, with a twist.

The Planet Saver, offered by a partnership between green savings group ekko and the Bank of London & The Middle East (BLME), allows savers to fund good causes, but only if they are willing to sacrifice some of their interest.

The bond pays two rates: 3.03 percent for three months or 3.4 percent for one year, while 1 percent goes to environmentally friendly causes.

If you want the best price, this is not for you. But for every £1,000 in the account, you’ll donate £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 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 the rates of your Direct Saver, Direct Isa, Junior Isa, Investment Account and Income Bonds.

The move aligns NS&I with guidelines governing banks and building societies.

These rules from City regulator the Financial Conduct Authority (FCA) require providers to tell you about the change within a period starting 14 days before the cut comes into force.

Providers can send earlier notice, but will need to send a reminder during that fortnight.

NS&I is not subject to FCA rules but to the government. However, HM Treasury expects it to comply with FCA requirements and reflect the standards of the rulebook. The change does not apply to Premium Bonds.

The prize fund was last reduced from 4.65 per cent to 4.4 per cent in the March draw, NS&I announced the change on January 11.

Your customer agreement on premium bonuses says: “The prize pool rate, prize values, winning odds and how we allocate prizes of each value may change from time to time.” Please check our website.’

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