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Boost for fixed-rate bonds

10 and 20 pound notes in a piggy bankSavers have had little to cheer about of late as the rates paid on their nest eggs have plummeted lower and lower in line with a string of interest rate cuts. In fact, you could now be earning next to nothing on the money you have squirreled away, given that nearly half (41%) of savings accounts for balances of £1 are currently paying 0.1%  or less in interest, while three are paying no interest at all.*

But with base rate on hold at an all-time low of 0.5%, savings providers have had a chance to review their positioning in the market, and there are now signs of improvement.

Battle of the bonds

Competition is re-entering the savings arena and this is particularly apparent in the fixed-rate savings market, where a flood of new fixed-rate bonds have been launched - paying pretty decent levels of interest.

While rates are nowhere near the heady heights of last year, when the top-paying accounts broke through the 7% barrier, there are now nearly 40 bonds paying rates of 4% and above. This is in stark contrast to the end of February, when you’d have been hard-pressed to find a single bond paying anything like this rate.

Long-term commitment 

But to cash in on these new great rates, you do need to be prepared to lock your money away for the duration of the bond - without being able to get your hands on it. And, to cash in on the very best rates currently on offer at the moment, you are going to have to tie up your money for two years or more, as providers are focusing their attention on their long-term fixed-rate deals.

Sign up to a short-term fix

That said, given that no-one can predict when and how quickly base rate and savings rates will recover, you may actually be better off tying your money up for the shorter term - for no more than 12 or 18 months, say. After all, the economy is cyclical - and you don't want to find yourself stuck on an uncompetitive rate if the cycle turns and rates start rising again.

Our pick of the current bunch of fixed-rate bonds

At present, one of the top picks for those who want to fix is the one-year ICICI HiSave fixed-rate account, paying 4%** on a minimum investment of  £1,000.

Take note of the strings attached

Before jumping headfirst into a fixed-rate savings bond, it is crucial you know the full terms of the account:

  • First off, you must be able to meet the minimum funding requirement. This is usually a deposit of £500, but could range as high as £5,000 - or even more.
  • Note that many deals only permit one deposit, which means you can’t pay additional money in after the account has been opened.
  •  Be aware that while some bonds will permit access, with most, you cannot make withdrawals without significant penalty of some or all of the interest earned up to that point.
  • Check what happens to your money when the fixed term ends. Some providers allow you to nominate an account for the money to be moved into, but others will transfer the money to a default account paying a paltry rate.
  • Remember that if you are the type of person who wants to dip in and out of your savings, a fixed rate bond is not for you.

Going forward 

There is now hope that in the weeks to come, other providers will follow suit and savers will be able to get a better rate of return on their money. In the meantime, make your money work harder by finding better savings rates at Confused.com.

* Investec Private Bank report - rates on 41 % of savings accounts for balances of £1 teetering on 'death row.'

** rates correct on 02/07/09