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%.
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.
Savers should consider a number of factors before deciding whether they should invest into a bond and the term they choose.
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.
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.
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 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.
For tax purposes, investment bonds act as life assurance policies, therefore subjecting them to tax on the returns gained.
By Sam Gooch