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Have fixed-rate bonds lost their allure?

Have fixed-rate bonds lost their allure?
Date of Publication: Monday, 03 February 2014 12:03

Savers no longer see the returns on fixed-rate bonds as good enough to warrant locking away their funds for years at a time.

 

Savers withdrew £42.6 billion from fixed-term accounts in 2013, according to Bank of England figures – around 15% of the total funds held in notice accounts.

 

The rate of withdrawal accelerated towards the end of the year, as savers chose not to trust the low returns on fixed-rate deals. Around £6.6 billion was withdrawn from fixed-rate accounts in December.

 

It is not the case that consumers are neglecting their savings. The total deposits held within banks and building societies went beyond £1 trillion last year.

 

However, it is clear that the returns on long-term fixes are no longer enough for people to want to sacrifice all access to their nest eggs.

 

Instead, savers have reverted to current accounts and easy-access savings accounts to allow themselves full flexibility with their funds.

 

Few no-notice accounts offer anywhere near the rate of inflation, but savers are able to withdraw and move their funds with fewer restrictions.

 

The fall in unemployment has prompted further discussion about the prospect of an interest rate rise over the next few years, which it is hoped will help savings rates to recover.

 

Savers who decide to fix at this juncture risk losing out if any interest rate rises in forthcoming years are passed on to savers.

 

Fixed-Rate Bonds Vs. Instant Access

In the autumn of 2013, the average returns on one-year bonds had fallen to just 1.67%, according to Moneyfacts - less than a third of the return available prior to the financial crisis.

 

Those who locked their cash away for longer stood to gain just 2.27%.

 

As it stands today, a small number of two-year bonds match the current CPI rate of inflation, though savers currently need to fix for at least three years (for example, through ICICI at 2.70%) to make any real-term gains. And this is only likely if inflation remains close to the 2% target.

 

Some of the best options on the table are in the unlikely form of current accounts, though it will almost invariably involve switching banks.

 

But with Nationwide offering up to 5% on deposits up to £2,500 and Santander offering up to 3% on deposits up to £20,000, current accounts are at least providing savers with a credible solution until the savings market shows some genuine sign of recovery.

 

For more on the predicament for savers, check out our guide: are current accounts the answer? You can also find out more about the new seven-day bank account switching system here.

 

bank account switch system

 

Keith McDonald

Which4U Editor

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Monday, 03 February 2014 12:03
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