Victoria Scholar discusses rise in interest rates
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Savers have breathed a collective sigh of relief over the last year, as the Bank of England hiked interest rates and the returns on best buy savings accounts surged.
Last November, market-leading five-year fixed-rate bonds were paying more than five percent.
Yet lately banks have been cutting best buy rates rather than increasing them, as they expect inflation and interest rates to fall sharply by the end of the year.
This is a huge blow, especially since inflation is still in double digits, so the value of cash deposits is shrinking in real terms.
Savers can fight back by shopping around for a better return, as a handful of smaller so-called “challenger banks” still offer competitive savings rates.
Savings platform Raisin UK is offering a five-year fixed-rate bond paying 4.5 percent a year, notably better than any other rate.
Interest on the savings bond compounds over the five-year term, which would turn a £10,000 deposit into £12,462 at maturity.
While 4.5 percent a year is much lower than January’s inflation rate of 10.1 percent, that may not be the case for long.
The BoE expects inflation to fall to around four percent by the end of this year, and “continue falling towards our two percent target after that”.
Anybody who locks into Raisin’s five-year fixed rate bond today could find that for the final four years of the term, its 4.5 percent rate is double inflation. Although as ever, there are no guarantees.
Raisin UK is a “savings marketplace” that offers a range of accounts from a selected number of banks and building societies, including exclusive deals that aren’t available elsewhere.
Other savings marketplaces include Aviva Save, Flagstone, Hargreaves Lansdown Active Savings and Interactive Investor Cash Savings.
Raisin’s five-year bond is actually provided by Turkish bank İşbank, which may worry some savers.
Yet deposits are still protected by the UK’s Financial Services Compensation Scheme (FSCC) in the usual way.
This guarantees to return the first £85,000 in your account should an FSCS-registered bank go bust, providing peace of mind.
The maximum deposit in Raisin UK’s bond from İşbank has been set at £85,000, so every penny benefits from FSCS protection.
If unconvinced, the second best five-year fixed-rate bond, from Renault-owned RCI Bank, pays 4.25 percent.
This would turn £10,000 into £12,313, giving savers £149 less in total. It is also covered by the FSCS.
Like almost every best buy account today, these are only available online.
Savers should not take out a five-year bond if they are likely to need their money in that time, as no withdrawals are allowed.
For those who cannot tie their money up for such a lengthy period, SmartSave pays 4.21 percent for 12 months, while Union Bank of India (UK) pays 4.35 percent a year for two years, Moneyfacts figures show.
Yet with inflation expected to fall, savers could benefit most from locking money away for the longest possible period today.
The prospect of finally beating inflation wil tempt many, although nobody can say for sure where consumer price growth or savings rates will go next.
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