Tell tale signs it may be time to lock away savings – and why three years is a sweet spot: SYLVIA MORRIS

October 9, 202428 Views 0 Comments

Updated: 03:15 EDT, 9 October 2024

Now could be an excellent time to bag a fixed-rate bond – if the latest murmurings from the Bank of England are anything to go by.

But you’ll need to be careful you don’t unwittingly lock your money away for years longer than you intend.

Last week BoE Governor Andrew Bailey said it could be a bit more aggressive in cutting interest rates. That would spell poorer deals for savers.

We will have to wait until November 7 to find out what this means in practice – when the Bank’s Monetary Policy Committee next meets to decide whether to cut the base rate from its 5 per cent level or leave it untouched.

Industry insiders tell me that while easy access accounts have had all the running recently, in terms of banks competing to win custom, fixed-rate deals are becoming flavour of the month and demand for longer term bonds is growing.

Time to fix? Industry insiders say fixed-rate deals are becoming flavour of the month and demand for longer term bonds is growing

It’s no wonder they’re proving popular if rates fall, as fixed-rate deals allow you to lock in a competitive rate for one or more years. The further rates fall, the better value today’s fixed-rate deals will prove to be.

There’s no way to guarantee what rates will do in the coming years although money markets are pricing in cuts to 4.5 per cent by the end of 2024.

But, moves by the banks in recent weeks reveal how they think things may play out.

Savings providers including Nationwide, Yorkshire BS and Coventry are not currently offering fixed-rate bonds that last longer than a year. Other providers are also withdrawing them or cutting the rate they offer.

Check the best cash Isa rates in our savings tables

That is likely because they don’t want to be caught out paying generous rates in a few years if the base rate has fallen. If you do decide on a fixed-rate account, you will get the most competitive deals if you fix for just one year.

But, if you plan to leave your cash untouched for multiple years, you are likely to be better off locking into a longer-term deal now rather than taking out a series of shorter-term ones every year.

Take, for example, the best one-year bond, which is from Union Bank of India at 5 per cent.

That is clearly better than the best two-year bond, which is 4.5 per cent from Cynergy Bank.

However, if you took out the one-year bond, you would have to find another one paying at least 4.05 per cent in a year to match the rate you would have received by opting for the two-year bond from Cynergy.

As rates continue to fall, finding such a deal a year hence seems increasingly unlikely. The best three-year deal is 4.6 per cent from GB Bank, which is slightly higher than the best two-year deal.

At the moment – with inflation at 2.2 per cent – locking in a rate that is more than double the cost of living, guaranteed for three years, seems like a great deal.

Only if inflation starts to spiral upwards again will it prove a poor choice and you may wish you’d opted for a shorter term.

That is the risk you have to take if you go for multi-year bonds – once your money is locked in there is no way out.

Providers should write to you 14 to 30 days before your bond matures to outline your options.

Nationwide and Virgin bank tie-up

Nationwide has now sewn up its controversial £2.9 billion takeover of Virgin Money.

It tells me that the two institutions will continue to work separately. That detachment became obvious the day after the October 1 takeover.

An email from Nationwide told me it was cutting its savings rate from November 1. On the same day Virgin Money told me it was increasing the rate on its easy-access savings account.

Nationwide Instant Isa Saver and Instant Access saver are now 2.05 per cent on up to £10,000 in the account.

On sums up to £50,000 you’ll see 2.1 per cent and if you have over this figure your rate will be 2.15 per cent. Not a good place to hold your money when you earn less than the current 2.2 per cent inflation rate.

Even if the rising cost of living slows down to the Bank of England target 2 per cent, Nationwide’s return is still lousy.

Virgin Defined Access E-Saver Issue 27 rate and its Defined Access Cash E-Isa Issue 31, went up to 4.51 per cent from 4.36 per cent.

You can make only three or fewer withdrawals from this account. If you make more the rate drops to 2 per cent for the rest of the year.

There are no changes to protection under the Financial Services Compensation Scheme of up to £85,000.

Usually that includes rolling into another bond or taking your money back. It’s easy to miss this letter if you are on holiday or your life is busy with other things.

If you don’t reply before your bond matures, some providers automatically roll you over into a new one, even if you don’t want it.

Among the large providers, NS&I Guaranteed Growth and Guaranteed Income Bonds work like this.

So do its index-linked and fixed rate certificates. If you are renewing your certificates, be aware of a change here.

On old certificates you could dip into your savings during the term. On certificates renewed from July 23 last year, you can’t – you are locked in for the whole term.

Barclays, NatWest along with Coventry, Yorkshire and Skipton building societies also roll your money over if they don’t hear from you.

Others – including Halifax, Lloyds, Santander and Nationwide – dump your money into their lousy easy-access accounts where you earn next to nothing.

But at least you can get hold of your money and reinvest elsewhere as you wish.

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