The one-year savings bond that offers a 5% return!

This new bond offers an unbeatable return, but you won't find it at your bank or building society.

Savers have long accepted that in order to secure the best rates on their cash they need to lock their cash away for a while.

The trouble is, even when you put your money away for a couple of years, the rates on offer from savings accounts are not exactly exciting.

However, a new one-year bond has been launched offering a whopping 5%! But you won’t find it on the high street.

The first peer-to-peer savings bond

This bond isn’t from a bank or building society – it’s from a firm called RateSetter.

RateSetter is a peer-to-peer lender (or a social lender, if you prefer), which allows you to lend your money directly to borrowers through its website, securing yourself a better return on your cash than if you stuck it in a naff savings account.

Up to now the firm has offered loans across three-, four- and five-year terms, as well as a loan offering monthly access to your cash.

However, now it has moved into the bond market with what it claims is the first ever peer-to-peer savings bond.

How it works

As with a traditional bond, you’ll sign up to a fixed rate of interest for a one-year term. And at the end of that term you’ll get your capital plus interest back.

There are two differences from normal bonds though. The first is where your money goes – with a bank, you are essentially loaning them your cash for the term of your bond. They can then lend that money out and make a few quid from your money. However, by going through a site like RateSetter, you are lending your money directly to the borrowers who would otherwise be going to the bank.

And that takes me to the second difference. With a bank, they tell you what rate of interest you’ll get on your cash, and that’s that – there’s no bargaining or negotiation. But with the RateSetter bond the rate is determined between you and the borrowers.

So if you want to immediately get your cash matched with prospective borrowers, the rate at the time of writing is 5%. However, you can set a desired rate of 5.1%, 5.2%, 5.3% or higher and wait for borrowers to agree.

How it compares

Let’s see how the rate on offer from the RateSetter bond compares with the rates available from traditional high street bonds.

Here are the top three one-year bonds:

As you can see, the best rates on offer are still some way behind the RateSetter deal. And to secure the market-leading bond from Investec you need to have a mighty stack of cash at your disposal! With RateSetter, you can open a bond with as little as £10.

Below are the best rates on offer from 18-month, two-year, three-year and five-year bonds, to demonstrate just how long you need to lock your cash up for in order to rival the RateSetter one-year bond:

So even locking your cash up for five years won’t get you a rate above 5%!

How safe is your cash?

Of course the biggest issue many people have with using a peer-to-peer site like RateSetter is that they don’t feel their money is safe. With banks and building societies you have the Financial Services Compensation Scheme (FSCS) as a safety net should the bank go bust.

Peer-to-peer sites aren’t members of the FSCS, so just how secure is your cash with them?

With RateSetter, only ‘prime’ borrowers are approved to borrow your cash. That means the firm checks their credit report from two different credit agencies, as well as manually assessing their circumstances before they get the green light. Your money is then spread across multiple borrowers so that your risk is spread.

Then there’s the Provision Fund, a stash of cash set aside to cover lenders should borrowers fall behind on their payments. However, as the firm admits, “The Provision Fund is not an insurance product and RateSetter cannot guarantee that the lender will be recompensed.”

So by using a product like this, your money is not enjoying the same protection that it would from a high street bank.

Apply for the RateSetter one-year savings bond here

More: Five ways to make a million | The UK’s best Cash ISAs