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.

It is commonsense that more and more people have unpaid and accumulated financial obligations that lead into people finding themselves in debt. As a consequence, creditors frequently call them in order to pay up. But similarly, we can talk nowadays about more and more complaints regarding abuses coming from the collections agencies. This is because people who are in debt are vulnerable, they are between wind and water, and they generally do not know how to handle abusive debt collectors. So for those who are annoyed with harassing debt collector calls, who feel pressured or even threatened, there are some useful tactics to keep in mind!

(more…)

With mortgage loans, borrowers can purchase real estate without the need to pay the full value of the property immediately from their own resources. Mortgages have an interest rate and are scheduled to amortize over a set period of time.

(more…)

Savers seeking the most effective way to save should not only build up a tax free savings pot using ISAs, but also be aware of the rates paid on balances to ensure they are earning the best ISA rates. bmi credit cards

This usually means transferring cash ISAs to get a better deal, but what are the rules around moving your cash between ISAs?

Which4U is aware that many savers are either baffled by the rules around ISAs, or not given useful information from providers. (more…)

To mark the start of the 2009 National Consumer Week we have focussed on a handful of laws that you may find extremely useful when buying products and services, especially during these turbulent times.

You may or may not  have noticed it, but consumers are fighting a war against the firms they have to deal with after falling victim to mindless companies, whether it be due to faulty products that need replacing, or out-right poor service. (more…)

Investment bonds have proven to be a hit amid the financial crisis, after the Bank of England cut its base rate to 0.5% – the lowest on record, forcing banks to reduce the amount of interest paid on regular savings accounts.

Investment bonds can vary significantly, but the general rule around them is that in exchange for some kind of risk, they provide the potential to earn higher returns that those offered on standard savings accounts, as your investment is not generally tied to fixed interest rates, but on the success of the area you invest in. (more…)

How to save your money

By the time you hit 30, there are a number of steps you should have or are planning to take to build on your financial knowledge to secure your future finances.

Life has a way of passing you buy, and before you know it you’ve lived out your 20s and suddenly you’re a fully fledged adult.

Welcome to the 30s club! Up to now, you have probably learned enough about yourself and your finances to know at least the basics for managing your money. Now it’s time to build up the foundations of this knowledge and experience to set yourself up for the future.

There are a number of steps that should be employed by anyone in their 30s towards a better financial future. 10 principles have been outlined below that can help you in reaching your retirement goals:

1. Your first objective should be to clear all non mortgage debt. In Your 20s you are likely to have far less financial responsibility, but 30s tend to bring new financial obligations such as a family to support and a mortgage to repay. One of the most effective ways of freeing up your cash is by paying off your debts. It is assumed that you will have paid off any credit card debts over the last decade, but if this is not the case then this should be your priority.

The most effective way to pay off credit card debt is through transferring the debt to a credit card that has a 0% balance transfer period. This will allow you to set up a payment schedule to clear the debt over the 0% period, without incurring any more interest. Most credit card providers will charge a transfer fee of around 3%, but this is likely to be significantly lower that the high rates you’re currently paying.

After these high interest debts have been cleared, focus on clearing any student loans and other forms of debt.

2. Lose the debt habit. It’s no good clearing all of your debts if you go out and acquire new ones.
One way of avoiding debt is by saving up for costly purchases such as new car or kitchen appliances. Now you’re debt has been cleared, you could deposit the money you would have otherwise been paying in interest and repayments into a high interest savings account. For example, you have just made your final monthly repayment of £250 on a loan, rather than simply giving yourself more disposable income, continue to make the payments but into a bank account. After a year you will have saved £3,000 without even noticing any difference in your outgoings.

3. Start taking a serious view to retirement. Most people don’t plan for their retirement in their 20s. This wasn’t the time to start investing and you may not have been paying into a pension fund. Now it’s time to start planning for your future and looking at all of the possibilities in terms of retirement and a pension fund.

This is everything, from what age you wish to retire; how you would like to live – how much money you will require, all based on a realistic goal that you can reach through what can seem like a lifetime of investing. Time is still on your side, so use it before it passes you by and makes things difficult. The earlier you start the better, and the more chance you will have of enjoying a comfortable retirement without having to give up too much until then.

Before you begin to think about saving for your children’s futures, e.g. education expenses, ensure you have sorted yourself out. You can easily take a loan out to pay for college, but not for retirement.

4. Don’t put all of your eggs in one basket. You should diversify your investments to ensure your cash isn’t tied up in one sector, as markets have been known to crash and this could leave you with nothing.

It is generally recommended that you should try to invest around half of your portfolio to large companies, split evenly across growth and value.

You may want to look into putting some of your savings into fixed rate bonds. These accounts allow you to fix the interest rate paid on your balance for a specified period of time, allowing you to predict how much the investment will earn. This is also good as the base rate is on a downward path, as a variable rate savings account would reflect these changes by reducing the rates. By fixing the rate you can protect yourself from these reductions. There is an element of risk involved in fixed rate bonds, as rates could also rise through the life of your account, which would leave your savings subject to a lower rate than that offered to new and variable rate customers.

5. Every day’s a school day. Continue to learn and never stop investing in yourself. You will begin to widen your investment knowledge, and it is this that will help your earning power through informed decisions.

6. Protect your assets. There is only so much planning you can do to prepare yourself for the future and even what appears to be a full-proof financial plan can be derailed as a result of unexpected cost. It can pay off to cover yourself from every angle, allowing you to survive every “what if” scenario. This can be as simple as taking out adequate insurances to cover your possessions and even your life.

It is also a good idea to save for an emergency fund, covering yourself in the event of a job loss, medical emergency or anything else that life may throw at you. This should be enough to cover all of your outgoings for up to six months. This may all be too much to take on, so you may wish to start saving a small amount towards this fund so you can build up a more substantial amount over a time.

7. The simple life. Saving your gratification for a distant future might not be fun, but adopting a simple lifestyle is an effective way to reach the goals of today, while still achieving your long-term goals. Take a close look at all of your regular outgoings and spending to identify areas that could be trimmed for the cause. Small sacrifices can lead to big rewards.

8. Write a Will. This may seem like a hasty step to take, but if  the unthinkable happen, you would have no choice in where your possessions go. A will can ensure that your wishes are met, allowing you to specify who would be entitled to your assets.

If you’re a parent to children under the age of 18, think about who could take care of them should something happen to yourself and the other parent. This can also be specified in a will.

9. A price on your life. If you have somebody who depends on you financially, it is important that you consider taking out a life insurance policy. If you died, you would want to be sure that they were financially secure. At 30, there are some great life insurance deals available to you. The premium can be reduced based on certain elements, such as not smoking.

10. Tax free savings. An effective way of saving towards a better future and taking advantage of your tax free savings allowance is through cash and investment ISAs. Each year, all individuals are entitled to an ISA saving limit of £7,200, in which they can invest cash and investments. There is a £3,600 limit on cash ISAs within any one tax year, but you can invest the full £7,200 in a stocks and shares ISA, with a Capital Gains Tax (CGT) exemption of up to £9,600 per year.

Protecting your money

Fixed rate bonds (otherwise known as fixed term bonds) are savings accounts designed for savers that are willing to take a little bit of a gamble with their money, without the actual risk of losing any of their original investment being lost, subject to the banks performance in line with the compensation limits offered. As long as your investment falls within the compensation limit provided by the bank or building society, the only thing you are gambling with the the interest you make.

Fixed term bonds feature many of the characteristics found in an instant access savings account, but with two main differences. Investors are expected to lock their savings away for a fixed period of time and the interest rate offered upon opening the account will also remain fixed throughout the duration of the bond.

Fixed term bonds usually offer better interest rates than instant access accounts, but this is not always the case, particularly when looking at bonds with longer terms. The reason for this is that these carry more risk to the banks as over the course of the term, the Bank of England could make significant interest rate cuts which would mean they would be paying over the odds for what they borrow.

As instant access bank accounts are generally the first to pass on rate changes, it is very important to be conscious of any changes. On the other hand, fixed term bonds provide peace of mind as rates will remain the same for the life of the bond.

During the last few months of 2008, The Bank of England cut its Base rate on several occasions, bringing it from 5.5% in October, to just 1.5% at the beginning of January 2009. This means that if you were lucky enough to open a fixed term bond account before these changes, you would now be benefiting from rates well above those currently offered on today’s market.

Some economists have predicted that rates will continue to fall over the coming months, so now could be a good time to apply for a fixed term bond account to fix yourself in on the best rate available.

However, there is another side to the coin, and this is where the gamble comes in. As well as the possibility of falling rates, you have to remember that it is equally possible that rates could rise, which would mean that the rate you are fixed at is below rates offered to new customers and instant access accounts. Before deciding on the type of account you wish to use, it is worth considering looking into the direction rates are predicted to take for the near future.

If you decide to put your savings into a fixed term bond, it is always a good idea to keep some of your money aside as backup. Circumstances often change without warning, and making early withdrawals to your bond can be difficult and is likely to incur loss of interest, so having a safety net will help to avoid you requiring access to your fixed term account.

Always ensure you are familiar with the compensation scheme offered by your proposed bank or building society. For more on compensation schemes and protection levels see Which4U’s Top Ten Savings Tips.

There are a some great fixed term bonds available, with rates well above the inflation rate and the Bank of England Base Rate, but these accounts may not be available for much longer, as it is expected that rates will fall further over the next few months. Compare the best deals at www.which4u.co.uk and apply for your fixed term bond today!

Weighing up your choices

Fixed Rate Bonds VS ISA’s

Knowing where to put your savings is confusing these days, especially based on how much stress the economy has been under over the last few months, pushing the Bank of England to make a string of cuts to its Base rate which have in turn been passed on to savers rates.

With Thursdays cut taking the Base rate down further to a new record low, rates on normal savings accounts have recently been slashed, which has limited our saving options, with saving suddenly becoming less attractive.

But there are still some good savings accounts out there, carrying slightly more risk to your returns than instant access accounts, but offering the best rates at present. The two types of savings accounts that stand out from the rest, are fixed term bonds and Individual Savings Accounts (ISA’s).

Although these savings accounts are similar in some respects, there are pros and cons to each that need to be evaluated before making a choice between the two.

Lets start with Fixed Rate Bonds.

The way that fixed rate bonds work is by providing a rate that is fixed throughout the duration of the agreed term, giving you a predictable source of income with no surprises.

Rates on these accounts can differ, with the higher rates generally paid on short-term bonds, and lower rates on longer-terms. This is because the shorter terms carry less risk to the banks, as significant rate changes would not have a lasting effect.

Fixed Term Bonds allow savers to make significant deposits, usually ranging between £500,000 and £2 million, but some, such as ICICI, come with no maximum limits, allowing savers to deposit as much as they like. Something that you must remember is that you can only make an initial deposit when opening the account, and no more throughout the duration of the bond.

There are no limits as to how many of these accounts you can open within any one year, so there is nothing stopping you from opening five separate accounts across different banks.

Some people will tell you that the success of your fixed term bonds involves luck, as the rate you sign in for will not be affected by the Bank of England Base rate, so if you choose to open your bond at the right time, you might find that your savings are earning far more interest that they would in a standard account. Knowing which direction the base rate is headed isn’t all about luck, you can often get an insight into predictions, and make an educated guess. But with all luck comes the flip-side – bad luck, so remember to do your homework as you could find that rates begin to rise and suddenly the rate on your bond is a lot less attractive.

If you think back to October last year, when the Base rate stood at 5%, you would be very chuffed with yourself if you had fixed in a rate as it peaked!

Many economists believe that rates will continue to fall during 2009, going as low as 0%.

You must remember that these accounts do exactly what they say on the tin, they fix the rate. Always make sure you are being realistic with your money, choose a term that is right for you and only go for this option if you can actually afford to lock your money away. In most cases, withdrawing early will close the bond and you will lose any interest you accumulated to date.

As with any normal savings account, the interest you earn counts as income, so is subject to tax deductions. For anyone on the lower tax band (under 34,800) the tax rate is 20%. For those earning above this rate must pay 40%. There are other circumstances in which non-earners may be given a tax free allowance, so check out the HM Revenue website for more information.

Next lets look at Individual Savings Accounts

Individual Savings Accounts (often abbreviated to ISA) offer a tax free option to saving. The difference with ISA’s and your average savings account is that you don’t have to pay any tax on the interest you earn.

Each year you’re given a £3,600 allowance that you can put into your ISA, and the interest accumulated from your total balance is tax free for life. You can still deposit up to £3,600 between now and April 2009, which is when your allowance is renewed, so if you decide an ISA sounds right for you, make sure you use up your allowance, as you cannot carry it over.

ISA’s offer a range of options to suit your needs, such as fixed rate, base rate guarantees and instant access.

Unlike fixed term bonds, most ISA’s will allow you to make as many deposits as you like, providing you keep to the £3,600 annual limit. To get the best returns on your ISA, you would be better to put the full £3,600 into your account as soon as your allowance renews, as this would allow you to earn the highest possible amount of interest. This will not suit everybodys savings plans, so you may be better to save as you earn, making monthly deposits from your salary.

As returns will often be high compared to some savings accounts due to tax redemption, interest rates offered on ISA’s tend to be lower than fixed term bonds.

Most ISA’s are affected when rate cuts are passed onto proviers, so you cannot guarantee your returns over time. If you were to open an ISA when rates were high, there would be no guarantee that they would stay high, and visa versa. Fixing your rate on an ISA would allow you to lock yourself in at a rate for a specified term. This does come with a certain amount of risk, as rates change, especially over a long period of time.

Both fixed term bonds and ISA’s are both great tools for saving as they encourage you to leave your money to grow. With an ISA, rather than capping interest earned to date and closing the account due to withdrawals, ISA’s simply give savers an annual deposit limit of £3,600, and once this has been reached, no more can be added, regardless of any withdrawals. This may not apply to all ISA’s so that’s something to check before applying.

Always make sure you’re aware of the compensation scheme used by your proposed provider. With the recent financial crisis, many financial institutions have been feeling the pinch, so although it may be unlikely that your bank would collapse, it should definitely be something that you look into. For more information which banks carry which schemes, and which banks fall under the same financial umbrella, see Which4U’s Top Ten Savings Tips.

The bottom line with any savings account is to always make sure you’re gaining the highest possible returns. Although ISA’s provide tax free interest, you could find that the difference in rates offered when comparing to fixed term bonds, will in fact leave you worse off. Before deciding, compare the savings market to give you an idea what’s available

One last thing to remember is to make sure your account is paying a higher interest rate that the rate of inflation, as anything below would cause your money to erode. This is because Inflation measures the rate at which prices will increase, so if this rate is higher than the interest rate you are earning, your money will be slowly eroding.

Securing your money

Prime Minister Gordon Brown has said he will do “whatever it takes” to ensure that people’s savings are protected as the economy continues to battle through the financial crisis.

The possibility of savers losing money deposited into a bank never even crossed the minds of most people, and it was not until Northern Rock suffered financial problems and had to be nationalised that this possibility became more of a reality. The initial strategy started the Financial Services Compensation Scheme (FSCS) raising the level of potential compensation on savers deposits from £35,000 to £50,000. This limit is currently under review for a further increase.

After the Icelandic bank Icesave collapsed, many panicked as conditions with the way that their compensation scheme was set up meant that UK savers would not be covered for the first £16,000 of deposits. The UK government reacted by assuring all UK Icesave customers that their money would be refunded in full, regardless of any limits set by the FSCS.

So what measures have been put into place to ensure the safety of savers if a UK regulated bank or building society were to face similar problems?

The Financial Services Compensation Scheme (FSCS) was re-enforced last October to ease the crisis, and there has been a lot of debate over how to improve the system.

How has the system improved?

Before Northern Rock fell into trouble, the first £2,000 of savers money was fully protected, then 90% of the following £33,000 was protected. This meant that a £35,000 investment was only covered up to £31,700.

In October 2007, the system was re-structured, protecting savers for 100% of the first £35,000 per institution per person. This meant that as long as your money was spread out between different institutions, you could effectively protect large sums of money, and joint accounts would be seen as two people, therefore covering £70,000.

In October 2008 that threshold was again raised, from £35,000 to £50,000 per savings account
per institution.
A fast track strategy has also been designed to provide those affected with access to some of their savings within 7 days of a bank closing.

It would currently take around a month before savers would be compensated if a large bank were to close.

How much of my savings are covered?

As it currently stands, any UK bank, building society or credit union will guarantee protection for deposits up to £50,000.

Banks from outside of Europe must set up a UK subsidiary in order to be allowed to operate in the UK and those subsidiaries must have a FSCS membership to provide protection on your savings.

Other systems are in place for banks based in the European Economic Area (EU members plus Iceland, Norway and Liechtenstein) that cover against their home scheme.

These schemes are set up to provide compensation for at least the first €20,000, although some offer substantially more than that which can amount to more than current UK protection limit.

Most of these schemes are also partly covered by the FSCS so any remaining money between the €20,000 (around £16,300) and up to £50,000 is also covered.

All individuals are currently covered up to £50,000, so joint accounts are seen as two seperate individuals, thus covering up to £100,000.

The protection limit only applies per institution, so if you have more than £50,000 savings it is recommended that you spread the money around to ensure you are fully covered.

For example, if you had £50,000 saved with Alliance & Leicester and an additional £50,000 with Abbey,  the full £100,000 would be protected. However, if you had accounts held with different brands that fall under the same institution such as Halifax and Bank of Scotland, you would only be covered up to £50,000 of your £100,000. Some institutions also allow multiple claims over their brands, so make sure you have done some research before deciding where to keep your money.

For an up-to-date list of which banks fall under the same institution and which are counted as independent with individual registrations to the Financial Services Authority (FSA) see which4u’s List of banks by institutions.

Something else to keep in mind is that if you have your money in high interest savings accounts, your £50,000 can quickly increase, taking it over the protection limit so your interest will not be covered. The best way to avoid any problems is to work out how much interest you expect to accumulate, and invest the limit minus the difference.

What protection is provided for small businesses?

The FSCS set up the deposit protection scheme for private individuals. However, small businesses can also benefit from similar protection to savers if the limited company meets at least two of the following three criteria:

• A turnover of no more than £6.5 million

• A balance sheet total of no more than £3.26 million

• No more than 50 employees

Partnerships can only claim up to £50,000, rather than £50,000 per partner.

Sole traders can only claim up to £50,000 in total, with both personal and business accounts included. This means that personal and business accounts must be spread over different institutions.

What about Irish banks?

The Irish government recently decided to offer full protection on all deposits, bonds and debts. This gives investers the freedom to keep all of their money in one place without having to worry about the possibility of losing any of it.

The banks currently offering this unlimited protection are Allied Irish, Bank of Ireland, Anglo Irish Bank, Irish Life and Permanent, Irish Nationwide Building Society and the Educational Building Society.

Gordon Brown has not followed Ireland’s move to offer an unlimited protection, but has stated that the government won’t let any UK depositors lose any money.