Everyone is jumping on the bond wagon

Fixed-rate investments carry a risk but they could provide a good return in these days of low interest rates, says Alessia Horwich

There may be light at the end of the savings tunnel. Over the past few weeks, a number of new fixed-rate accounts have appeared paying in excess of 4 per cent for terms between one and five years. However, although many will be tempted to jump at the chance to make a decent return on their cash, tying up your money now when no one can predict economic movements could be risky.

The base rate has stuck at 0.5 per cent for the past two months, but in the same space of time the number of fixed rate deals has risen sharply. At the beginning of March, as few as five fixed-rate accounts could be found around the 4 per cent mark; today there are 75. "Banks are looking at their savings books and trying to lock money away to use as their lending capital," says Michelle Slade, spokeswoman for online information service Moneyfacts.co.uk. As a result, competition between banks to get their hands on your cash is fierce.

Even the Government has cottoned on, raising the rates on NS&I income bonds by 1 per cent to 1.71 per cent for deposits below £50,000 and 2.02 per cent above. These investments are not technically bank accounts, but mini-loans to the Government on which they will pay a monthly dividend. That said, the rate change is indicative of what other banks in the market are thinking about their savings rates. "In this volatile period, everyone is trying to find the right level for the right product," says John Prout, NS&I customer sales and retention director. "We are looking at the marketplace and trying to bridge the gap between our bonds and other similar products."

The latest bank to up its fixed-rate account returns is Indian outfit ICICI, which now offers 4 per cent (up from 3.45 per cent) on a one-year bond, 4.35 per cent for two years and 4.40 per cent on a five-year bond, all with a minimum deposit of £1,000. For those with less to put away, the Bank of Cyprus UK pays 3.70 per cent on a one-year bond with a minimum deposit of £1. As always, the longer you are willing to part with your money for, the better the return you will get, but putting such restrictions on your money for a considerable length of time comes with downsides. And despite the Icelandic banks fiasco, don't necessarily be put off by a non-native bank. To trade in the UK, financial institutions need a banking licence, and that means the same protection under the Financial Services Compensation scheme.

But you might not want to jump in to a long-term deal just yet. Interest rates are pitifully low and so a return of 4 per cent is substantial in comparison. But interest rates should rise. This could mean that you are tied into a deal paying 4 per cent, when other accounts are paying more. For shorter-term bonds, this isn't such a worry. "The short-term outlook says interest rates aren't going anywhere soon, so locking in for now seems a good deal," says Darius McDermott of independent financial adviser Chelsea Financial Services. "But it depends of the length of the bond. A 4 per cent bond over three years looks extremely attractive, but for four or five years you just don't know."

Tying up your money can be a gamble. "I am uncomfortable about people buying into tied products for long periods," says Jason Butler, a partner at Bloomsbury Financial Planning. "When rates drop abnormally it's a short-term aberration, and you shouldn't make long-term decisions on a short-term scenario. When you tie your money up, you should do it only if the return is more important than everything else." If drawing an income is the only requirement, a savings bond will provide this security. However, if you do have some flexibility, variable savings that rise in the future may offer similar average returns over time as a fixed-rate bond.

If you are willing to take the risk of tying up your money but want much more in return, it could be worth considering corporate bonds or equity income funds. These are not cash investments, but will pay a monthly return or dividend and you also have the potential for capital gains on your original investment. Mr McDermott says, "Corporate bonds are looking extremely attractive. With interest rates at 0.5 per cent and dividends around 5 per cent, equity income could also be a good strategy for medium- to long-term holders."

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Life and Style
Marie had fake ID, in the name of Johanna Koch, after she evaded capture by the Nazis in wartime Berlin
historyOne woman's secret life as a Jew in wartime Berlin
News
news... and what your reaction to the creatures above says about you
News
Jihadi John
newsMonikers like 'Jihadi John' make the grim sound glamorous
News
newsAnother week, another dress controversy on the internet
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

    £25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

    Recruitment Genius: Customer Service Advisor

    £15000 - £16000 per annum: Recruitment Genius: A Customer Service Advisor is r...

    Ashdown Group: Trainee Consultant - Surrey / South West London

    £22000 per annum + pension,bonus,career progression: Ashdown Group: An establi...

    SThree: HR Benefits Manager

    £40000 - £50000 per annum + pro rata: SThree: SThree Group have been well esta...

    Day In a Page

    The difference between America and Israel? There isn’t one

    The difference between America and Israel? There isn’t one

    Netanyahu knows he can get away with anything in America, says Robert Fisk
    Families clubbing together to build their own affordable accommodation

    Do It Yourself approach to securing a new house

    Community land trusts marking a new trend for taking the initiative away from developers
    Head of WWF UK: We didn’t send Cameron to the Arctic to see green ideas freeze

    David Nussbaum: We didn’t send Cameron to the Arctic to see green ideas freeze

    The head of WWF UK remains sanguine despite the Government’s failure to live up to its pledges on the environment
    Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

    Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

    Set in a mythologised 5th-century Britain, ‘The Buried Giant’ is a strange beast
    With money, corruption and drugs, this monk fears Buddhism in Thailand is a ‘poisoned fruit’

    Money, corruption and drugs

    The monk who fears Buddhism in Thailand is a ‘poisoned fruit’
    America's first slavery museum established at Django Unchained plantation - 150 years after slavery outlawed

    150 years after it was outlawed...

    ... America's first slavery museum is established in Louisiana
    Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

    Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

    The first 'American Idol' winner on how she manages to remain her own woman – Jane Austen fascination and all
    Tony Oursler on exploring our uneasy relationship with technology with his new show

    You won't believe your eyes

    Tony Oursler's new show explores our uneasy relationship with technology. He's one of a growing number of artists with that preoccupation
    Ian Herbert: Peter Moores must go. He should never have been brought back to fail again

    Moores must go. He should never have been brought back to fail again

    The England coach leaves players to find solutions - which makes you wonder where he adds value, says Ian Herbert
    War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

    The battle for Mosul will unleash 'a million refugees'

    Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn
    Yvette Cooper: We can't lose the election. There's too much on the line

    Yvette Cooper: We can't lose the election. There's too much on the line

    The shadow Home Secretary on fighting radical Islam, protecting children, and why anyone in Labour who's thinking beyond May must 'sort themselves out'
    A bad week for the Greens: Leader Natalie Bennett's 'car crash' radio interview is followed by Brighton council's failure to set a budget due to infighting

    It's not easy being Green

    After a bad week in which its leader had a public meltdown and its only city council couldn't agree on a budget vote, what next for the alternative party? It's over to Caroline Lucas to find out
    Gorillas nearly missed: BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter

    Gorillas nearly missed

    BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter
    Downton Abbey effect sees impoverished Italian nobles inspired to open their doors to paying guests for up to €650 a night

    The Downton Abbey effect

    Impoverished Italian nobles are opening their doors to paying guests, inspired by the TV drama
    China's wild panda numbers have increased by 17% since 2003, new census reveals

    China's wild panda numbers on the up

    New census reveals 17% since 2003