Time to watch your step on rate rises: Staggered five-year bonds look attractive

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SAVERS tempted by stepped saving schemes offering up to 12 per cent interest after five years should do their sums carefully before investing - especially after last week's 0.5 per cent base rate rise.

As some experts forecast further base rate increases before Christmas, investors may want to wait before committing their money to a long-term fixed-rate investment.

Stephen Braddock, a dealer at the Treasury desk at Lloyds Bank, believes that rates on these deals are unlikely to go much higher. 'Short of a major event, such as a sterling collapse or catastrophic trading figures, there is not much more to be squeezed in terms of higher interest rates,' he said.

'It could be argued that things are stretched as tight as they can be at the moment, with little potential for higher rates in the medium term.

'Anyone gambling on higher rates in two or three years' time should ask themselves whether the Government is prepared to sanction them so shortly before an election. It may pay to invest now, at least over a three-year period.'

It also pays to check exactly how much that headline-grabbing rate really does pay. Barclays Bank has recently launched a five-year Investment Bond offering 6 per cent in year one and rising to 12 per cent in the fifth year. Over that period, pounds 10,000 would produce an overall income of pounds 4,200. A large part of the increase comes in the final year, when the rate rises from 9 to 12 per cent.

Portman Building Society also launched a five-year bond with a 12 per cent top rate. Yet savers would receive pounds 4,600 from a pounds 10,000 investment. This is because the society's rates are 1 per cent higher than Barclays' except during the final year.

Stroud & Swindon Building Society this week launches its own escalator bond, offering 7 per cent in year one, rising to 12 per cent in the final year. It too will pay pounds 4,600 gross income on a pounds 10,000 investment.

Unlike many bonds, Stroud & Swindon's also allows savers to leave their funds in the account rather than taking it as income. If interest is left to accumulate, it will yield pounds 5,518, an average rate of 11.04 per cent gross.

A Barclays spokeswoman said: 'What we are trying to do is reward people who are prepared to stay with us for the full five years. We appreciate that it is a long period, but we will give you that 3 per cent leap in the final year.

'Although we are aware that we are not the best among major building societies and banks for this product, we still believe that we are among the top three or four.'

Although some experts believe that savings rates are unlikely to rise further, in the past few months yields from escalator bonds have gone up.

Overall returns on Portman's five-year bond have increased by pounds 750 since June, when it paid 6 per cent in year one and just 10 per cent in year five.

West Bromwich last week relaunched its Guaranteed Income Account, paying 7.5 per cent in year one and 11.5 per cent in the final year. Total returns over five years will be pounds 4,425.

Halifax also upped its five- year escalator bond rates last week, starting at 7.25 per cent and rising to 12 per cent. This compares with 7 per cent in year one and 11.25 per cent in year five. These changes may make it worthwhile to wait and see whether other societies will also offer slightly better terms; in particular, easier access to one's funds.

Because you may want to switch in an emergency, it is a good idea to watch out for withdrawal penalties. Portman does not allow partial withdrawals, but it does allow closure of the account, subject to loss of 90 days' interest.

Woolwich allows withdrawals after two years, after which closure is also allowed, subject to 90 days' interest penalty.

West Bromwich, however, allows no withdrawals or account closures, unless the holder has died.