Question: I have a fixed rate bond maturing soon and I am looking for somewhere to put the funds. In the past I have just taken out another fixed rate bond, but I am concerned that by doing this I will miss out on any increases in the Bank of England Base Rate. Are fixed rate bonds still worth considering at the moment?
Despite all the recent press around possible Bank of England base rate increases, we are still in the dark as to when the base rate will rise, and most importantly for savers (and borrowers) how this will affect consumer interest rates. What we do know however is the Governor of the Bank of England Mark Carney has stated that when interest rates do rise it will be gradual and limited, so a significant overnight increase in rates won’t be on the cards any time soon.
Despite the base rate remaining at an all-time low of 0.5% for almost 6 years now, providers have continued to reduce the interest rates they offer to both new savers but more worryingly to existing savers, with many now on derisory rates of interest. This disconnect between savings rates and the base rate is a concern, especially for those that may be waiting on an increase in the base rate for better returns in the near future.
The fact remains though, whatever the market offers we should make every effort to ensure our savings are working as hard for us, as we have worked to earn them in the first place.
We believe it’s about balance; a balanced savings portfolio that allows you to access some of the best rates now while keeping some money in accessible accounts to allow for future rises in rates. With this in mind we should at least consider tying up some funds that we don't immediately need if it works out to be more financially beneficial.
To avoid any confusion, we are not discussing corporate bonds which are an investment product and fall outside the remit of Savings Champion and our cash management Concierge Service. We are referring to fixed rate cash saving deposit accounts provided by UK banks and building societies.
Typically fixed rate bonds come in standard fixed terms of 1,2,3,4 and 5 years. There are also 6 month and 7 and 10 year options available from time to time. However, some providers now offer more flexibility; Punjab National Bank for example offers a 1 to 2 year bond where the exact term in day increments can be selected at outset, so a specific maturity date can be assigned in advance. Particularly useful, for example, if you have funds that are available now for a January 2016 tax bill. Another recent variant is the Investec 5 year Step up bond that paid a fixed rate for the first two years, then an increased rate for the subsequent three; giving an average full term rate.
Our experience tells us that savers lock their funds away for a number of reasons. These include;
• Saving for a specific time based purpose, i.e. their childrens’ university fees or a distant anniversary date
• To get that bit extra of interest for funds that are surplus to requirement
• To lock away to prevent impulse purchases.
• Ensure a guaranteed fixed return for a set period of time
• Simply to avoid having to worry about the funds until they mature. An out of sight out of mind approach
• To bolster the overall returns provided by your savings
Logic would tell us though that with savings rates at an all-time low it is nonsensical to tie any funds up, as rates are likely to increase within the term and you would be stuck in these dreary offerings. Without knowing for sure what the future will bring, it is difficult to say. But what is clear is that rates would have to increase significantly for you to be worse off over the term, and for this reason bonds could be considered, even longer term ones.
Our Concierge team considers the merits of fixed rate bonds on a case by case basis. But, in general, for surplus funds, fixed rate bonds can form an important part of a balanced savings portfolio. To this end, we often utilise staggered rolling fixed rate bond strategies to maximise returns, hedge against market fluctuations and to maintain an element of liquidity.
When considering fixed rate bonds there are a number of conditions to be aware of.
Firstly, is access allowed during the term and if so what penalty is applied? It is worth checking as some providers do not allow any access to the funds under any circumstances, even on death mid-term. And if a penalty does apply, if enough interest has not been earned, it can be taken from your original capital investment, so you may get back less than you put in.
Secondly, how and when is the interest paid? Some bonds pay out monthly or annually, so the interest cannot be compounded. Furthermore, bear in mind when deciding on the value of the initial deposit if the interest is being compounded and added to the bond you would need to allow 'space' within the £85,000 FSCS protection you are afforded.
Speak to an adviser here before you make that decision, as a quick call could make a substantial difference over the term to you.
As we hold information on the ten thousand plus rates in the UK we will always be able to advise whether this is actually the best rate available on the whole market, not just what you will see on the best buy tables.