Earn 5% on your savings for FIVE years!

You can get a market-leading rate of interest on your savings if you lock them up. But is that a smart move?

It goes without saying by now that it’s not exactly an exciting time to be a saver.

It has reached the point that the best way to get a decent return on your savings is to put them in one of the various market-leading current accounts – perhaps the Alliance & Leicester Premier Direct account or the Santander Preferred In-Credit account, both of which pay 5% on balances up to £2,500, or the Lloyds TSB Classic with Vantage which pays 4% on sums between £5,000 and £7,000.

Compared to the fairly meagre rates of interest available in specialist savings accounts, for those savers with only a modest sum of cash put away for a rainy day, a current account certainly appears to be the best bet.

Indeed, you can even employ this very sneaky trick when using the current accounts to really maximise your return.

Hey big saver

However, there is a way to secure such an eye-catching rate of interest on far larger sums thanks to the Indian bank ICICI.

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Do this goal

ICICI offers a HiSAVE Fixed Rate account, paying 5%, and with no maximum sum, while you can open the account with as little as £1,000.

There is, inevitably, a catch to consider. The account is a five-year bond – in order to take advantage of this rate, you’ll need to say goodbye to your cash for half a decade.

Your money is safe

Before I go any further, it’s probably a good idea to review just how safe your money is with ICICI.

After the debacle with the Icelandic banks, a lot of British savers are reticent to put their cash in banks based abroad, and that caution is completely understandable.

However, it’s worth remembering that ICICI is regulated by the Financial Services Authority, while it’s also a member of the UK Financial Services Compensation Scheme, so the first £50,000 of your savings are completely guaranteed and safe.

A certain bet

No fuss

The other positive is that this account is designed for savers – rather than current accounts, which are really just designed for day-to-day use – and so you won’t be penalised for having a decent stack of cash set aside.

With the ICICI HiSAVE Fixed Rate account you also won’t need to comply with set amounts that have to be paid into the account each month, as is the case with the current accounts.

Out of reach

However, there are a few downsides too. For starters, there is the obvious problem with signing up to a five-year bond – your money is untouchable for that time. You have to be in a position to lock that money away for five years, without putting your finances under undue strain as a result.

So if you are likely to need to get your hands on your cash in the next couple of years, it’s probably not the best bet.

Rising Base Rate

The biggest negative for me is the situation with Bank Base Rate. As we all know Bank Base Rate has sat at 0.5%, a record low, for more than a year now. And, with Base Rate at least, what goes down must come up.

We highlight five things you should consider when choosing a savings account.

Plenty of economists have been happy to predict that Base Rate will continue at such lows for a fair while to come, and I have no doubt many readers will agree with them. However, the minutes to last month’s meeting of the Monetary Policy Committee, the group that meets each month to decide what will happen to Base Rate, may throw that into doubt.

The minutes were published this week and revealed that one member of the committee, Andrew Sentance voted for a rise of 0.25%, due to fears over inflation.

This is very significant as it marks the first time in two years that a member of the MPC has voted for a rise in Base Rate. What’s more, inflation – which is already well above its 2% target – is generally expected to increase still further thanks to the VAT rise announced in the Budget, which makes an increase in Base Rate in the next few months even more likely.

So why does this make a difference when choosing a five-year bond? Well, at the moment, a 5% deal looks very appetising. But if Bank Base Rate starts to move upwards a little faster than expected, then the rates on offer from bonds both short and long-term will also increase. As a result, we may soon rates on offer which surpass that available from ICICI.

It might be better to play the waiting game and take out a lower-rate but competitive account now, in order to get a higher rate in the future. For example, the ING Direct (UK) Savings Account pays a fixed rate of 2.75% but is also easy access, so you could instantly switch accounts should rates rise but will have the peace of mind and security of a fixed rate in the meantime.

Making your mind up

Whether the ICICI bond is right for you really comes down to your own situation. As with any bond, it’s only worth going for if you know that you won’t need that money for a while. In this case, five years is quite a long-time, so it is a commitment to hand it over for that long.

You’ll also need to decide for yourself what you think will happen with Base Rate, and whether you want to take a good rate now, or gamble that rates will increase sufficiently that better bonds will be available in the next couple of years.

To give you an idea of what you can expect from the bonds currently in the market, here are some of the best across the various time periods on offer.

Provider	Bond length	Gross APR	Min / max investment
ICICI Bank	Five years	5%	£1,000 / n/a
Aldermore	Five years	4.56%	£1,000 / £1m
ICICI Bank	Four years	4.25%	£1,000 / n/a
Aldermore	Four years	4.25%	£1,000 / £1m
ICICI Bank	Three years	4.16%	£1,000 / n/a
Post Office	Three years	4.10%	£500 / £1m
ICICI Bank	Two years	3.70%	£1,000 / n/a
Post Office	Two years	3.70%	£500 / £1m
First Direct*	One year	5%	£25 / n/a
Norwich & Peterborough**	One year	5%	£20 / £3,000

*Must hold 1st account current account

**Must hold N&P Gold current account, into which salary of at least £1,000 is paid.

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