While the Bank of England base rate remains a the lowest level ever recorded – at 0.5%, most savings accounts offered by banks and building societies pay derisory rates of interest.

At the end of 2009 the average branch based instant access savings account paid a measly 0.17%, which a notice account wasn’t paying much more than 0.33%.

However, if you look at the top 10 savings accounts in the Which4U comparison tables, you will notice that the best rates are offered on fixed rate bonds, so if you’re willing to lock your money away for a fixed period of time, you could be earning up to 4.75%.

How do they work?

A fixed rate savings bond is a bank account that allows you to earn high interest rates in return for agreeing to leave your money without making any withdrawals until the agreed term is reached.

Returns on the investment are limited to the interest paid on the account, which can be calculated before the bond is opened, providing a predictable income.

Fixed bonds differ from standard deposit accounts as the interest rate is guaranteed to remain the same throughout the fixed period. The terms differ, with rates to reflect the term, but they usually last from between 6 months and anything up to around five years.

The interest accumulated every year is added onto the balance and paid on maturity.

It is generally possible to access your funds in an emergency, but doing so would result in the account being charged with a loss of interest.

Banks and building societies offer more attractive rates of interest on this type of investment because it gives them the ability to gain access to secure long term deposits.

Currently, the best five year fixed rate bond pays a rate of 4.75% (Nationwide bond) per annum compared to the best instant access accounts offering 2.80% (Halifax).

You could argue that rates will change over the next 5 years, so you need to consider this when making a decision on the term, as you could find that you are earning less than the current instant access accounts are paying.

Should you consider them?

Savers should consider a number of factors before deciding whether they should invest into a bond and the term they choose.

When will you need the money?

Avoid being drawn in by an attractive rate without fist making sure that you can do without the money until the bond matures.

The cost of borrowing money is usually greater than the return you will get from the bond, so this is a no no.

Are interest rates likely to go up during the term?

This can be a difficult call. The answer is simple, people can make predictions to the direction of interest rates, but no one knows for sure.

But considering how long the Bank of England base rate has stayed at 0.5% (since March 2009) and the fact that some economists believe it will remain this low for another 12 months, savers can be more comfortable with getting good rates for just one or two years, giving them the flexibility to reinvest again in a few years time.

What do you give up to qualify for a better interest rate?

For the better return, savers do give something up – the access to their savings for a set period and access now to the interest earned.

So for savers who need an income now these products may not be suitable.

There is also the possibility of losing the chance to use the money more profitably, perhaps by investing in other assets such as equities, or paying off a mortgage.

Investment bonds

Investment bonds are fundamentally different and involve investment not saving.

The policies are typically sold by life assurance companies which allow you to invest in a variety of funds (either investment trusts or unit trusts) managed by professional investment managers.

Bonds are usually used for long term capital growth but can also be used as a means to generate income.

Investment bonds tend to invest in a wider range of assets than savings bonds, including UK and overseas equities, commercial property, fixed interest securities, and cash- like investments.

In most investment bonds, investors can choose the amount in which they wish to invest into and can change the weighting of their investments several times a year.

Taxation

For tax purposes, investment bonds act as life assurance policies, therefore subjecting them to tax on the returns gained.

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The new tax year is approaching, and with it comes a new top rate income tax, meaning that those fortunate enough to be earning over £150,000 will be required to pay 50% income tax on anything above this amount.

In addition, higher rate on dividends will move from 32.5% to 42.5% of the grossed up income (equivalent to 36.11% of the net dividend) for taxable income above £150,000.

As a result of the changes to become effective from 6 April, private banks and wealth managers have been advising those who will be affected to act now in order to protect their income. Many are taking steps to bring forward earnings to this tax year, or plan their finances in an attempt to lower the impact.

Below are some tips outlined by Which4U that higher earners should consider:

1. Make full use of all your tax allowances Many of us complain about how much tax we pay, but forget to take advantage of tax free breaks. The truth is, many of us could be missing a trick when it comes to tax relief.Always ensure you have used up your allowances by the end of every tax year. A popular tax free savings incentive is your first port of call, in the form of individual savings accounts (Isas), with an annual allowance of £10,200 (or £7,200 for those under 50 until April 6th), as well as tax-free National Savings & Investments products.No income tax is required to be paid for any interest or capital gains earned using Isas, so make sure you shop around to find the best Isa rates, or alternatively if you wish to invest in a stocks and shares Isa, do some research into the market.

   Transfer investments that provide an income to your spouse, if he or she does not work or has earnings that fall in a lower tax band. This now not only applies to spouses on the basic rate tax but also those paying 40%, if the other spouse currently earns above £150,000 per year.

2. Close your bank account According to advisers at Deloitte, those that have a savings account paying interest on an annual basis that is due to be paid after April, should consider closing the account before the new tax rules kick-in in, allowing the interest payment to be subject to a lower rate of income tax. After, you can simply open a new bank account.
3. Donate to charity in the new tax year After 6 April, high earners making donations using the Gift Aid scheme will qualify for higher tax relief, which means that more money will be given to the charity. However, you should think about the potential impact delaying your regular donations could have on the charity, especially in the current financial climate.
4. Accelerate your income Some employers have chosen to pay employees their salaries early to avoid the higher tax. Consider asking your employer if this is a possibility. This may be easier for those in entrepreneurial or family businesses.You can also make use of any share options you currently hold, as these attract income tax so you will pay the lower rate. Those already getting pension income are able to opt to receive annual payouts as a lump sum before the changeover date in April.
5. Add more to your pension fund in the new tax yearIt has become apparent that pensions are looking more of an unattractive option to higher earners, with tax relief cut to 20% on some contributions.However, if you do fall into this category, you may want to act fast. In the 2010/2011 tax year, those earning more than £150,000 will be eligible to put in at least £20,000 and up to £30,000 with 50% tax relief, before the new restrictions come into play in 2011.Advisers at Deloitte have suggested that people earning between £100,000 and £113,000 – who will effectively be paying 60% tax from April as a result of their personal allowance also being eroded – should also add to their pensions.
6. Consider venture capital trusts (VCTs) Although these start-up investment schemes can be quite risky, they are being labelled as an alternative to a pension fund for higher earners because contributions attract 30% tax on the way in.
7. Move your assets into an offshore bondOffshore bonds are investment bonds that are operated by life insurance companies and also have some life insurance attached to them. This enables you to avoid paying any tax until you encash the bond. The idea is that by the time you come to encash the bond, you may be subject to a lower rate of income tax, for example when you’re retired – or if you have become an expat or a non-dom, you may not have to pay any UK tax whatsoever. Many well known financial advisers are using this approach for clients.
8. Change from income investments to Capital Gains Tax In 2008, capital gains tax was lowered to 18%, and investors have since been looking to acquire returns that are taxed as capital gains rather than income. According to advisers, the 50% income tax band has sped-up this switch. Over the past year, demand for products such as zero dividend preference shares has significantly risen, as well as funds that work on a total return basis instead of generating income, such as absolute return funds.
9. Consider leaving the countryThis may seem like a rather extreme measure – but advisers at Cazenove and Schroders Private Bank have said that many of their clients are considering this option in response to the substantial tax demands.