Where do you keep your savings? In an instant access account? Instant access accounts are attractive because they give you peace of mind. You know that if you ever need your savings, you’ll be able to get hold of your cash quickly and not have to pay any penalties.
Trouble is, you can normally get a better return if you’re prepared to put your money in a fixed rate bond. Sure, you’ll have to lock your money away for a year or more, but the rate will nearly always be better. So when you choose a savings account, ask yourself this question: "Will I really need to access my cash over the next year or two?"
If the answer is ‘probably not’, you should consider a fixed rate bond. And the good news is that the current range of fixed rate bonds has improved this month - Kent Reliance has launched a very attractive one-year savings bond that pays 3.66% in interest.
The bond is called the Limited edition one-year fixed rate bond. 3.66% may not seem a high rate, but in today’s rotten climate for savers, it’s a market-leading rate.
What’s more, if inflation falls over the next 12 months, the interest you earn on your savings won’t be affected. You’ll carry on earning 3.66% until the bond expires in a year.
No other one-year bond pays such a good rate, but there is a downside. You can only get 3.66% if your savings pot is worth at least £50,000. So this isn’t a viable account for many of us.
[SPOTLIGHT]If you have at least £1,000 to play with, you could still sign up for a one-year bond with Kent Reliance but you’ll only get 3.6% in interest. Still, that’s a significantly better rate than you’ll get from the best instant access accounts.
Bigger returns
Bonds can deliver an even better return if you’re prepared to lock your money away for a longer period.
So let’s look at the top rates for fixed rate bonds that last for longer than a year:
Top fixed rate bonds
|
Bond |
Duration of bond |
Minimum amount |
Interest rate |
|
2 years |
£500 |
3.9% |
|
|
2 years |
£500 |
3.85% |
|
|
2 years |
£1000 |
3.85% |
|
|
3 years |
£1000 |
4.15% |
|
|
3 years |
£1 |
4.15% |
|
|
5 years |
£1000 |
4.7% |
|
|
5 years |
£1000 |
4.65% |
We think the three-year bonds look especially attractive. Many pundits think that inflation is set to fall, and if the pundits are right, 4.15% could prove to be an inflation-beating return by Christmas 2012.
No guarantees
Of course, there are no guarantees when it comes to predicting the future. Yes, many pundits think that a sluggish economy will push inflation down next year, but if Israel and Iran were to go to war, we’d expect the oil price to soar and inflation with it.
So if you want to be absolutely certain that your money will keep up with inflation, you might be better off with an index-linked product that is guaranteed to match or beat inflation.
Sadly, there are very few index-linked products on offer at the moment, but you might be attracted by Santander’s Inflation-Linked Savings Bond. With this bond, the value of your savings will rise in line with inflation plus an extra 5% of that rise.
However, you will have to lock your money away for five and a half years which is a longer period than the vast majority of savings bonds. It’s a long time to commit yourself for!
Another option is to go for the Governor Money Bank of Ireland UK - 5 Year Fixed Rate ISA. It will give you a 4.5% annual return tax-free, but you will have to tie your money up for five years, only six months less than for Santander’s Inflation-Linked Bond.
So the message is clear. If you want to get the best return on your cash, you need to lock your money away for a year or longer. Given that many of us are saving for the long-term, perhaps for retirement, that really shouldn’t be a problem. Bonds are best!
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