December 9, 2009, 2:12 pm

Savings 2009 – The age of the fixed rate bond

by: The Financial Blogger    Category: Investment, Market and Risk
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Despite unpredictable times at the beginning of the year, as well as the Bank of England’s decision to keep the Bank Rate at the historically low 0.5 percent, the public are still eager to save.  Yet, for those who want the best returns a fixed rate account is sure to be the best bet – and as the winter sets in the popularity of fixed accounts are soaring.

The latest research from financial experts show that the number of people looking for a fixed rate have increased by 8 percent over the year – from 29 to 37 percent.  This jump is quite significant in regards to the current popularity of easy access accounts, which have dropped from 32 to 27 percent over the same time.

However, it are fixed rate bonds that are offering savers the best returns at the moment – with the best offers giving around two percent in comparison to the average easy access account.  Yet, if you want to get the best savings rates (around 5 percent) you’ve got to be willing to leave your money there for five years – which is as big ask for many savers who are anticipating the possibility that within that time their interest rates will lose their competitive edge.

Subsequently many are opting for shorter fixed rate accounts, and there are many one and two year options to be had from certain banks, but with lower rates accordingly.  These are currently the most popular choice, with – according to – 78 percent of savers admitting that they would only be willing to go without access for a maximum of two years.

Of course, savings especially offshore savings and bonds options are not always as simple as I have described above – i.e. short-term low rates and long-term higher rates.  Certain banks such as Sainsbury’s are offering accounts that give high rates (3 percent and a 2.5 percent bonus) should you only make three withdrawals over 12 months, but if you make more than three the rate drops to 0.5.  While Leek United Building Society offer a so-called Escalator Bond where the rate increase the longer you leave your money in there.

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I am not a fan of fixed rate bonds at these rates, especially not out side of a tax sheltered account like a 401K or RRSP or TFSA. Interest is taxed much higher than dividends. I beileve is you are looking for a dept instrument like a bond your are far better off going with preferred shares. For safety just by a preferred share ETF. One I had mentioned earlier on my blog pays over 6% and is very diversified. This is a much more tax efficient way of investing in a personal account.