Deal of the Week - 5% savings bond

What’s the deal?

A savings bond from the recently merged Co-operative Bank and Britannia Building Society that pays a fixed rate of 5 per cent for three years. The deal requires a minimum investment of £5,000, up to a maximum of £1m. Savers can access their funds by closing their bond during a 30-day window each year, subject to a penalty of 2 per cent interest for that year only. Interest is paid annually.

Is this good?

It’s the highest-paying three-year savings bond to be launched since the summer.

Allowing annual access gives flexibility for savers who want to withdraw cash early. Other deals paying 5 per cent require savers to commit funds for four or five years, with many bonds not offering any early access.

What’s the catch?

The penalty for early access reduces the rate to 3 per cent for the year of withdrawal. With base rates set to rise over the next three years – potentially sharply – the risk is that other savings returns will rise above 5 per cent. The fixed-rate bond does not qualify for Co-op’s membership dividends, which can add 0.1 percentage points to returns on the group’s other savings products.

What’s the alternative?

The leading one-year bond, launched this week by Melton Mowbray Building Society, pays 4 per cent on balances of £1,000 or more, according to Moneyfacts, the rate service. Several providers, including the AA and Kent Reliance Building Society, pay 4.25 per cent on two-year bonds.

Savers can also earn 3.6 per cent on instant access accounts with Ulster Bank, part of Royal Bank of Scotland, on its Pathfinder account.

Savers could split their cash between the Co-op/Britannia bond and shorter-term deals to combine higher returns with access. There is currently little extra reward for tying up cash for longer terms.

How do I find out more?

Britannia or Co-operative Bank branches, www.britannia.co.uk or call 0808 156 1208

www.moneyfacts.co.uk for savings comparisons.