Money Insider: A good new fixed-rate bond - but no touching for a decade

 

Leeds Building Society has launched a new fixed-rate bond paying a monthly income at an attractive 4 per cent, but the downside is that you forfeit access to the savings balance for 10 years.

The mutual offered a similar 10-year 4 per cent fixed rate deal last November which was snapped up within three weeks – whether that was down to a high level demand or only a small amount of money being made available we'll never know.

This latest long-term savings bond will no doubt put some consumers in a quandary – on one hand the monthly income at a rate of 4 per cent is very competitive in the current savings environment, yet having no access to your capital for a decade is a big concern.

The minimum you need to tuck away to open this new bond is £10,000 and despite the long-term lock in I can see it appealing to some savers as part of a wider, more diverse savings portfolio.

Whether this will turn out to be a wise savings choice is difficult to judge due to the long fixed term, particularly as experts and economists have repeatedly got it wrong when predicting potential base rate rises over the past three or four years .

I'm sure many people looked at the 10-year fixed rate savings bond from Birmingham Midshires in the summer of 2008 and thought it was too much of a risk, too.

But in hindsight the rate of 6 per cent on offer at the time would have turned out to have been a very shrewd move.

If, and it's a big if, you are completely comfortable locking your cash away, it's worth weighing up the monthly income available from this deal and whether that's the important aspect of this bond in your circumstances.

For example, based on a savings pot of £50,000 the Leeds BS 4 per cent bond will deliver interest of £133.33 every month (after 20 per cent tax) for the next 120 months.

With so many unknowns that could impact future interest rates, it's difficult to call whether this is a good deal, but much will come down to individual savers' needs and preferences.

Interest rate rises are a distinct possibility in the next six to 12 months, with some predictions of base rate being at 2.5 per cent in three years. If that is the case, the other question is how much of that 2 per cent increase will be passed on to savers by providers?

It's not easy being a saver at the moment, trying to select the best deal for your cash – it's tricky enough trying to predict where rates will be in 2016, let alone 2024.

To add to the confusion, 4 per cent equates to 3.2 per cent net for a basic rate tax payer, which means this 10-year deal is currently much better than the best five-year fixed rate Nisa deal of 2.85 per cent (again from Leeds BS).

For the majority of us the 10-year term is the deal-breaker here, but I'm sure there will be a decent take-up from those keen to secure a higher level of monthly income.

It's when you realise that you have to lock your funds away for 10 years to get a half decent return that peer to peer looks even more tempting – with RateSetter this morning offering 4.5 per cent for three years and 6.4 per cent for five years, with Zopa at 5.2 per cent for five years.

Many savers may dismiss this account out of hand due to long-term lack of access, but if income is your key requirement and you've got some other accessible cash to fall back on in case of an emergency, then 4 per cent a month may be just enough of an incentive to tip the scales.

Andrew Hagger is an independent personal finance analyst from www.moneycomms.co.uk

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