Fixed-rate savers who have been earning 7 per cent-plus for the past year face an inevitable drop in cash returns as existing deals mature.
However, while the base rate is still at just 0.5 per cent, competition is returning to the savings market, with new fixed rates available at up to 5.1 per cent and best-buy instant access returns above 3 per cent.
Fixed rates on lump-sum savings hit a record high above 7 per cent last summer, while popular deals such as Halifax’s Regular Saver offered 10 per cent for those depositing up to £500 a month.
With the greatest number of these deals on offer in July and most lasting a year, the coming weeks are set to see a spike in maturities, according to Defaqto, the research firm.
Analysts warn that in addition to generally lower savings rates, many of the “go to” rates paid by providers when deals mature will be uncompetitive – underlining the value of shopping around for better returns.
“Until now some savers will have been somewhat sheltered from the low-rate environment, but they are about to come down with a bump,” said Kevin Mountford, head of banking at Moneysupermarket.com, the comparison service.
“The golden rule for anyone coming to the end of their fixed-rate deal is: pay attention to the return you are then given, and switch to a new deal as soon as the rate drops off.”
Analysts point out that while fixed rates are lower than last year, the highest-paying bonds offer a bigger premium over the base rate and instant access accounts than previously.
Mountford said most recent searches for fixed-rate savings on Moneysupermarket.com had been for one-year bonds. These rates have fallen in the past few weeks, though still offer up to about 3.75 per cent.
However, a new five-year bond from Newcastle Building Society paying 5 per cent could also prove attractive for many savers. Despite its lengthy term, the bond allows penalty-free withdrawals at 90 days’ notice. “This is an excellent deal for savers who can wait three months for their money,” Mountford said.
By contrast, savers going for long-term fixes that do not offer access – including Barnsley Building Society’s new 5.1 per cent bond – risk being locked in to an uncompetitive return when interest rates rise again.
Two-year bonds could still be worth considering, say experts. With rates of up to 4.5 per cent, these offer a good premium to one-year and variable-rate deals – but without an excessively long tie-in.
Savers wanting instant access to their cash are also seeing better returns again, with the top rates back above 3 per cent. Alliance & Leicester and Coventry Building Society yesterday launched internet-only deals at 3.15 and 3.25 per cent respectively. A&L’s Online Saver Issue 5 rate includes a bonus until August 2010. Coventry’s eSave is available only to over-50s and allows unlimited penalty-free withdrawals even though the rate is fixed for 12 months.
A clutch of providers, including Intelligent Finance, have also increased their rates on existing savings accounts in recent weeks, according to Moneysupermarket.com.
However, Mountford warned that providers might use high variable rates to “hook in” new savers, and then cut returns.
Savers with maturing fixed-rate bonds may also be able to pick up better returns by shifting out of cash. Adrian Lowcock, senior investment adviser at Bestinvest, said: “There are non-cash alternatives that will give a 5 per cent yield with the prospect of capital growth as well.”
He suggested high-grade corporate bond funds such as Fidelity Moneybuilder Income. Corporate bonds still offer a better investment opportunity than equities, he believes, even though bond yields have already fallen this year. However, on a longer-term view, UK equity funds could prove attractive, particularly as the economy emerges from recession.
