We savers love an easy-access account. There is a whopping £910 billion in them, more than three times the £269 billion in fixed rate bonds.
It may be tempting to stick with an account that allows you to access your money at any time, but now is the perfect time to consider a fixed rate bond.
Rates on easy-access accounts are starting to fall, but rates on fixed-rate bonds are still rising, although probably not for much longer, so act while you can.
In its forecast last week, the Office for Budget Responsibility predicted that inflation would fall below the Bank of England’s target rate of 2 percent within a few months, almost a year earlier than forecast six months ago.
As inflation decreases, interest rates are likely to decrease as well. Money markets expect the Bank of England’s base rate to fall this year from 5.25 percent to 4.2 percent in the final quarter of 2024.
Is it time to fix it? Rates on easy access accounts are starting to fall, but rates on fixed rate bonds continue to rise, but for how long?
That makes rate cuts on easy-access accounts more likely. Four providers – Paragon Bank, Close Brothers Savings, Virgin Money and Hampshire Trust Bank – have already reduced their cap rates.
But rates on fixed-rate bonds have been rising as competition among providers intensifies.
While the maximum easy access rate is 5.08 percent from Charter Savings Bank; You can get a higher rate on a one-year bond at 5.28 percent from SmartSave.
The top rate for two years is now 5 per cent after increases by Hampshire Trust Bank and Close Brothers. Hodge Bank also pays 5 per cent and others may soon join it.
Getting a longer-term solution can be difficult as your money is locked in until the end of the term.
But if your plan is to purchase a one-year bond now and then another when it matures in 12 months, it would be better to opt for a two-year bond.
Because if you earn 5.25 percent for one year now, you’ll need to find a new one-year bond that pays at least 4.75 percent next year to match the top 5 percent two-year bond available now. Rates are likely to fall below this figure within a year.
Five-year fixed-rate accounts pay less than short-term rates, and you may be reluctant to tie up your money for that long.
The top rate is 4.54 per cent from Hampshire Trust Bank or 4.53 per cent from Shawbrook and Close Brothers.
But if you know you won’t need your cash, it could be a good bet as rates are likely to drop.
A cash Isa can also be a good option for a longer-term solution, as you can close an Isa whenever you want and get your money back. You may lose interest or have to pay a penalty, but you can get it in an emergency.
Five-year interest rates are lower with Isas – you can get just over 4 per cent from Close Brothers, United Trust Bank, Secure Trust, Zopa along with Principality and Nottingham building societies.
If you opt for a bond for more than one year, remember to choose one that pays interest and allows you to withdraw it at the end of each year, rather than one that pays off in full at the end.
If you receive all the interest at once, it counts towards your personal savings allowance in that tax year.
This allowance allows you to earn up to £1,000 in interest if you are a basic rate taxpayer, £500 if you are a higher rate taxpayer and no allowance if you are an additional rate taxpayer. Anything you earn above your limit is taxed at your income tax rate.
If you earn all your interest at once, you are more at risk of defaulting on your personal savings allowance than if you drip each year of your account term.
NS&I to offer ‘mid-market rate’ bonds
Good news for savers: National Savings & Investments (NS&I) will next month launch a three-year bond to be known as the British Savings Bond.
NS&I has yet to announce pricing or when it will go on sale, only revealing it will be “early April.”
But I assume it will be in the first week, coinciding with the start of their new financial year on April 1.
It has also confirmed that the rate will be at a “mid-market” price compared to those paid by other providers.
The current best rate is 4.65 per cent fixed for three years (Hampshire Trust Bank), but they are as low as 3.65 per cent or 3.7 per cent (Co-op Bank and Santander).
Therefore, to be in the middle of the pack, I think NS&I would go for a rate of around 4.15 percent.
Without a doubt, the rate should be better than that offered to the 400,000 savers in their three-year Guaranteed Bonds.
These have not been on sale since September 2019 and the rate on such bonds is a modest 3.45 percent after it was reduced from 5.8 percent earlier this year.
The big advantage of NS&I is that all your money is guaranteed by the Government.
But be careful, the way bonds are structured puts you in danger of having to pay taxes on your interest.
Sy.morris@dailymail.co.uk
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