Two-year fixed rate bonds are still drawing savers in with their competitive rates, with some providers offering as much as 4 per cent before tax to those interested in using online banking or the telephone to manage their affairs, experts say.
The personal and business bank account provider offering this best buy, Investec Bank, does require a minimum balance of £25,000 in order to gain access to the high interest rate. However, for savers with pockets not quite as deep, a new two-year fix from Nottingham Building Society offers an almost as high 3.85 per cent return before tax while only requiring a minimum £1,000 deposit, with savers earning the rate until the end of May 2014.
There are downsides to fixed rate bonds, experts say. One common thread is that banks and building societies will hold your money throughout the entirety of the term, preventing you from gaining access to your cash in the event of an emergency.
Another common problem is the fact that, while the inflation rate has begun to decline from its eye watering 5 per cent high in late 2011, the Consumer Prices Index now measures the cost of living as rising at a rate of 3.4 per cent. After taking basic tax rate into account, none of the best offerings are above the current inflation rate, leaving a gap that allows inflation to erode the value of any accrued savings.
Some savers seek to circumnavigate this by taking up an inflation-linked bond, but experts warn that unless you select one that offers a guaranteed minimum rate if inflation bottoms out, you could end up with a long-term savings product with a dismal rate of return. Economists have been predicting that the nation’s inflation rate could finally meet the Bank of England’s target rate of 2 per cent by the end of the year, making traditional fixed rate bonds more attractive.