Societies step up bid for savers

IN LINE with the expectation that interest rates are set to rise, investors are being wooed with a range of products that increase yields on their funds each year.

Escalator accounts often start by paying savers a lower rate of interest than might otherwise be available in the first year. But every 12 months, the income rises slightly, reaching a maximum after five years.

At present, the highest eventual rate available for monthly income is 10.75 per cent from Birmingham Midshires Building Society. Rates on its four-year Step-Up Account start at 5.75 per cent in the first year. For people taking annual income, the rate goes up to 11 per cent.

Another society, the West Bromwich, also offers 11 per cent on its Monthly Income Account, but over a five-year period. However, savers receive a slightly higher income of 7 per cent in the first 12 months.

Bradford & Bingley last week entered the fray with its Maximiser Stepped Rate Bond, paying 6 per cent monthly income in year one, rising to 10 per cent in the fifth year.

Skipton's Step-by-Step bond also pays up to 11 per cent gross over five years, but only annually and for investments above pounds 30,000. For sums of pounds 5,000 or less, the gross amount paid is 10 per cent annually or 9.6 per cent monthly.

The amounts on offer reflect the belief that interest rates will rise over the longer term. Many savers therefore want to see the income they will get in future years not only guaranteed but also rising each year.

Nick Broughton, marketing director at Confederation Bank, which offers its own Accelerator Bond, said: 'What we are able to do is do swaps on tranches of long-term money at higher rates of interest. These obviously reflect market expectations.

'One has to be careful with the size of the swap. For example, if we had been offering a product like this a few months ago, the bottom rate then available might have been 5 per cent. This would no longer be as attractive now.' Confederation Bank's bond pays 6.5 per cent in year one, rising to 10.75 per cent after five years.

The slightly lower fix available on its escalating bond can be seen by the guaranteed amount paid on its level-income product, which pays 8.3 per cent throughout its life.

Because of the potential risk that interest rates could rise by even more than the long-term money markets expect, investors should also look at potential penalties for withdrawing their savings early.

For example, West Bromwich does not allow withdrawals throughout the life of its bond. Birmingham Midshires only allows access after two years, with an interest penalty of 180 days.

By contrast, Portman Building Society, which pays a more niggardly 10 per cent on its five-year Step-up Bond, allows immediate access with an interest penalty of just 90 days.