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.