Expert says 4.60pc savings account may be ‘best deal this year’

What are interest rates?

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Savers and pensioners should therefore consider locking into today’s rates as they may not rise much higher. This could be as good as it gets.

The Bank of England has repeatedly hiked base rates as it battles to curb inflation. Banks and building societies have followed by offering higher savings rates, with smaller so-called challenger banks leading the charge.

At the same time, rising yields on bonds have driven up the income that pensioners receive when buying an annuity, which pays a guaranteed income for life.

Bank rate is now three percent, the highest since the 2008 financial crisis. Until recently, markets expected the Bank of England to increase it to six percent to curb inflation.

Many savers and annuity buyers held back from locking into a market-leading deal in the hope of getting an even better return in a few months.

However, now their calculations may have to change.

Interest rates may not rise as high as expected in the aftermath of former Chancellor Kwasi Kwarteng’s disastrous mini-Budget.

Anna Bowes, co-founder of savings rate tracking service Savings Champion, said there is a growing belief base rates may now peak at just 4.5 percent.

Those who assume that will go much higher than that may be disappointed, and waiting could backfire.

Just a few weeks ago, best buy one-year fixed-rate bonds paid up to 4.60 percent, while five-year bonds paid 5 percent a year.

Savers cannot get those rates today.

At time of writing, Shawbrook Bank pays 4.30 percent for one year, while RCI Bank pays 4.60 percent over five years.

Bowes said these are still some of the best we have seen in a decade but cautioned: “They have dipped in recent weeks as competition eases and some best buy savings accounts have been withdrawn.”

She said savers may not see better rates than these two in 2022.

“If you are looking to boost the interest you earn and are happy to tie up your cash, now could be a good time to do it.”

Interest rates on variable savings accounts have also slowed, although Nationwide offers 2.50 percent and RCI pays 2.45 percent. “If the BoE does hike base rates again as anticipated, they may rise a little more,” Bowes said.

Last year, a 65-year-old buying a level single life annuity with £100,000 of pension could get a guaranteed income for life of just £4,500 a year. Today, they could get as much as £6,800.

That’s an incredible difference, giving them £2,300 extra income every year for life.

Annuity rates have jumped 50 percent to the highest level since 2011 but are also showing signs of topping out, said Andrew Tully, technical director at Canada Life.

Another base rate increase or two would increase them but not by much more from here. “Delaying your purchase may therefore not help much.”

Many pensioners gave up on annuities after they were given the freedom to stay invested and take cash lump sums as required via drawdown.

Annuities have swung back into favour as returns improve, but Tully warns inflation could eat into your returns.

“Most choose a level annuity, where the income is fixed for life. However, with inflation at 11.1 percent, its value will be quickly eroded in real terms.”

It is possible to get an annuity that rises in line with inflation but this will pay a lot less in the first year, while steadily rising thereafter.

Tully said people could get round this by using some of their pension to buy an annuity today, but leave the rest invested in drawdown to grow and combat inflation. “This could be the best of both worlds.”

Rate movements are hard to predict and it is worth taking independent financial advice as this is a complicated area.

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