What’s the deal?
Fixed rates of 5 per cent on three-year savings bonds. Competition has driven up returns on these and other longer-term bonds, even though the base rate is still at its 0.5 per cent low.
Principality Building Society is the current market leader, paying 5.11 per cent to October 31 2012 on its Direct Fixed Rate Bond Issue 143, followed by Barnsley Building Society’s 5 per cent to September 30 2012 on its Online Bond, according to Moneyfacts, the rate service.
Savers can put between £1,000 and £250,000 into the Principality bond, while Barnsley accepts deposits of £100 to £500,000.
Is this good?
The attraction is the high return without a very long tie-in. Previously, to earn 5 per cent on lump sums, savers have had to commit funds for five years. Such rates are a record premium over the base rate – the top three-year bonds also pay an extra half a percentage point over the highest two-year deals. One-year bonds pay under 4 per cent and variable rate offers are just over 3 per cent.
Most savings rates are expected to remain under 5 per cent for the forseeable future, with the base rate forecast to be unchanged until 2010. So, locking in to the additional reward on three-year bonds could prove worthwhile.
What’s the catch?
Savers cannot access their cash for three years, or are heavily penalised for withdrawals. Principality charges savers one-year’s interest if they want their money back early, and part-withdrawals are not permitted. Barnsley does not allow any early access. So savers should only invest funds they are sure they won’t need in the interim.
When the base rate does rise, bond-holders could find they are tied into increasingly uncompetitive rates. Conventional wisdom has been to limit bond investments to two-year terms. The rates on three-year deals give savers a bigger headstart, but also a longer window during which they could be overtaken.
What’s the alternative?
Savers who are concerned about returns becoming uncompetitive later in the term could split their funds between three-year and shorter deals. This would offer the benefit of a higher rate on some funds with greater access to the remainder.
West Bromwich Building Society offers the leading two and one-year rates, at 4.45 per cent and 3.9 per cent respectively. The top instant access rates include 3.3 per cent on Coventry Building Society’s 1st Class Postal account and 3.25 per cent from the Egg Savings Account, according to Defaqto, the research firm.
There is little extra reward for tying up cash for four years – with Barnsley offering the highest rate at 5.15 per cent – while five-year bonds pay up to 5.45 per cent.
How do I find out more?
www.moneyfacts.co.uk or www.moneysupermarket.com are comparison services listing the highest-paying deals.
