Putting your savings into a fixed-rate bond is a great way of getting a good interest rate. Anyone who locked up their cash a few years ago will have been enjoying great rates of return compared to what is on offer now. But make sure you know the terms and conditions of your bond – and most importantly, when it matures.
When most bonds mature, providers move the balance into standard easy-access savings accounts, which tend to pay highly uncompetitive interest rates. So if you aren’t on the ball and don’t move your money to an account with a better interest rate, you could lose up to £1,000 a year in interest, reckons Moneysupermarket.com.
For example, Capital One’s 2004 issue five-year fixed-rate bond, which was paying 5.85%, matures this month, and savers will see their interest rate drop by 5.1 percentage points, meaning a £15,000 deposit will earn £765 less in interest per year.
And anyone who took out a one-year fixed-rate bond with Firstsave a year ago will see their interest rate fall by six percentage points on maturity, losing someone with a £15,000 balance £953 a year in interest.
But don’t automatically assume you’ll have to move your money. Some banks offer competitive rates on the savings account your money will be moved into. For example, when United Trust Bank’s three-year fixed deposit account from 2006 (which paid 5.6%) matures, the money will be shifted straight into another fixed-rate account which is exclusive to existing customers and pays 4%.
So read the terms of your fixed-rate account and find out when it matures and what rate your money will earn after maturity. And if you need to switch, start shopping around. If you are prepared to tie your money up again, then Saga’s three-year fixed-rate bond looks attractive with a 4.65% interest rate. The key benefit of this account is that, should interest rates rise and better deals appear during that period, you can withdraw your money early with only 90 days’ loss of interest.
• Ruth Jackson writes the weekly MoneyWeek Saver personal finance email. Sign up to MoneyWeek Saver here.