Thanks to the recent fall in inflation, you can now lock your money away into bonds for half the time and still beat rising prices.
Just a few months ago, any savers interested in fixed-rate bonds would have needed to lock away their cash for a minimum of three years to match the rising cost of living.
Now, thanks to a combination of lower inflation and slightly higher bond rates, it is possible to beat inflation by investing your cash for just 18 months.
The annual rate of inflation fell to 1.6% in March, it was revealed yesterday, down from 1.7% in February.
This marks the lowest rate for four years, and the first time that inflation has fallen for six consecutive months since the index began in 1997.
It means that – all else remaining equal – standard rate taxpayers would need to earn 2% on their savings to match inflation.
So, for anyone looking to invest £5,000 or more, Shawbrook Bank’s 18-month bond offers an inflation-busting 2.05% (1.64% net).
Those with less to invest may be interested in the 18-month bond from the Islamic Bank of Britain (IBB), which offers fractionally less at 2.02% with a smaller minimum deposit of £1,000.
Two-year deals are also looking healthier at the moment. Close Brothers Savings have recently launched a new 2.40% bond (1.91% net) for deposits of £10,000 or more. Shawbrook Bank is strong here too, offering 2.30% (1.84% net) on deposits of at least £5,000.
Those with less to invest will find themselves disappointed, however.
United Trust Bank, Britannia, and ICICI Bank offer the highest rates available at two years for lower deposit levels (2.05%), but returns on these accounts will only just nudge above inflation – and that’s if it remains at its current low level.
Fixed-Rate Bonds or ISAs?
In past years, it’s always been worth promoting bonds as an alternative.
The tax-free cash ISA limit was limited to a few thousand pounds, and bonds offered attractive rates that make it worth locking funds away for a few years at a time.
The table have since turned, however. The cash ISA limit allowance is rising to £15,000 per year from July, which means that the majority of savers will probably not need to look elsewhere if they find the right tax-free account.
But banks and building society are still offering pretty poor returns on ISAs. The best instant access ISA, at 1.75%, is available through the Stafford Railway Building Society, but inbound transfers are not permitted.
A 45-day notice ISA from National Counties at 1.75% does allow inbound transfers, but customers will need to add (or transfer) at least £5,000 to qualify.
And locking funds into a fixed-rate ISA offers little more. The best options here are an 18-month ISA bond with Halifax, which offers 2%, and a two-year ISA with Santander, which offers 2.30% to existing 123 current account or credit card customers.
Elsewhere, new Regular Saver ISA products from Nationwide and the Saffron Building Society offer 2.50% and 4% respectively – though Nationwide’s ISA offers more flexibility for savers to fulfil their new £15,000 allowance.
Hence, it may be worth building towards the higher tax free allowance if there is no interest incentive to lock into bonds instead. Bonds always remain an option if rates improve to reflect the commitment of locking funds away.
Current Accounts? Try TSB's 5% Plus Account
But for those with around £2,000 looking for the best interest returns, the TSB Classic Plus current account might be a good solution.
If you’re able to deposit £500 a month into the account, TSB’s new Plus account offers 5% with no artificial bonus rate. You don't have to switch your direct debits and you’ll get a hefty 4% net interest and retain full access to your cash.
Then, next March, you’ll be able to throw your funds into an ISA – regulations permitting – and boost your tax-free nest egg as well.
And even if inflation returns to the Bank of England’s 2% target in the months to come, the TSB account looks like it will remain far above this for some time to come.