Savers warned off a long-term fix as rates plummet
Savers are being warned not to tie their money up in a long-term fix.
Experts say it would be ‘madness’ to hand over your money for five years with rates at their current low levels.
In the past week, Halifax, Santander and Nationwide have all cut rates for those taking out fixed-rate bonds or tax-free fixed-rate cash Isas.
Halifax now pays a miserly 1.6 per cent after tax (two per cent before) to savers willing to lock their money up for five years.
Fixed-rate bonds and Isas usually pay a decent premium if you are willing to go without use of your cash for five years, rather than just one or two.
But the amount of extra interest you currently earn as a trade-off for leaving your money untouched for these extra years is so small it is not worth doing it.
More... Best savings rates: Fixed-rate accounts Best savings rates: Cash Isas, fixed rate Isas, regular savings Isas How to start saving, beat the taxman and track down the best rates Our savings picks: This is Money's five favourite best buy cash Isas for 2013
Furthermore, by tying it up for four or five years you will lose the flexibility to move your money if things get better.
Martin Bamford, from independent adviser Informed Choice, says: ‘It would be madness to lock your money up for five years with rates so low.’
Savers tying up £10,000 for five years will earn just £160 interest a year after tax with Halifax, or a total of just £800 over the term.
At HSBC it’s a pathetic 1.5 per cent (1.88 per cent) for five years.
Some three-year rates are also appalling. At Halifax you get 1.44 per cent (1.8 per cent) and at HSBC an even worse 1.19 per cent (1.49 per cent). These rates are below the top deals available on one or two-year fixed-rate bonds where you can earn 1.89 per cent (2.36 per cent) (see table).
Savers coming to the end of their fixed-rate bonds now will see a huge drop in income.
Among the worst hit, with a drop of up to 41 per cent, are those who took out two-year bonds at 3.16 per cent (3.95 per cent) 24 months ago. The best they can do on similar bonds now is 1.89 per cent (2.36 per cent) — giving £189 interest a year on each £10,000 against £316 over the past two years.
Three years ago, savers could fix at 3.32 per cent (4.15 per cent) for 36 months; now private equity-owned Shawbrook Bank and State Bank Of India offer the best deals at just 2 per cent (2.5 per cent), a 40 per cent drop.
One-year bonds are also down 38 per cent, from 2.8 per cent (3.5 per cent) a year ago to 1.72 per cent (2.15 per cent).
The drops are similar for those looking to tie up their Isa money in the hope of a better return.
These falls follow the launch of the Government’s Funding For Lending scheme last summer, which offers banks and building societies a cheap pool of money, making them less reliant on savers.
