Get the best savings bond of the year

Find out how to earn a top guaranteed return of up to 5% every year until 2012, and still get access to your savings.

Whenever I talk about fixed rate bonds, I usually recommend you only lock into a rate for one or two years at the very most. That's because it's very difficult to predict when interest rates will start to climb and how fast, especially over the long-term.

Once you open a fixed rate bond you'll know exactly what your return will be until the account reaches maturity. This is a big advantage in theory but there's a downside: your rate won't remain competitive if interest rates begin to rise rapidly, as the new bond issues which come onto the market are likely to pay more generous rates than you're getting now.

Having said that, I expect interest rates to remain low in 2010, so a short-term fixed rate bond seems like a sensible solution as long as you can afford to tie your money up.

Decent short-term bonds

Right now there's a clutch of decent short bonds which last under two years and all offer rates of 4%. Take a look at the best of the bunch below:

But what if you want a better return than 4%? Is your only choice to lock in for even longer and keep your fingers crossed that your guaranteed rate keeps pace with the competition?

A bond with a difference

Thankfully the answer is no because Britannia* has just launched a great new account - the 3 Year Fixed Rate Bond (Issue 29) - which pays a fantastic market-leading rate of 5% AER for the next three years on savings of £5,000 plus.

Hang on a minute! Didn't I say I wouldn't fix my rate for longer than two years?

Well I did, but I think Britannia has managed to get round the fixed rate gamble by - and this is the best bit - offering you a unique option to close the bond early every year on the account anniversary. In fact, you'll have a 30-day window before the end of each 12-month period when access is temporarily available.

So unlike most bonds, you're not stuck with the account for the whole term. If you become dissatisfied with a 5% annual return in a year or two years' time, you can withdraw your money and put it somewhere else. In other words, should rates rise to the extent where you can earn a better return elsewhere, you won't have to miss out. Perfect!

Is there a catch?

It's unusual to have this kind of access with a fixed rate bond, so it's not surprisingly that it doesn't come for free. Closing the bond early will trigger a 2% interest penalty. In others words, if you decide to shut the account at the end of year two, for example, you'll earn a return of 5% in year one, and a lower return of 3% in year two once the penalty has been deducted.

All you need to do is work out whether the rate you can earn in an alternative savings account is high enough to justify the 2% penalty.

You should also note that partial withdrawals aren't allowed. You'll only have a choice of closing the bond down completely or continuing until the next anniversary.

Is it worth it?

Even if you find you want or need to close the bond at the end of year one or two, I still think a 3% return for the year is pretty reasonable in the current climate. Look at it this way: the very best easy access savings accounts are only paying a shade more than 3% anyway.

Don't forget, the most competitive account in the market with true (i.e. penalty-free) instant access is the AA Internet Extra account which pays 3.15%. Today that's just 0.15% ahead of the return from the Britannia bond even if you had to close it early, and a good deal behind it if you don't.

I think Britannia is doing a great job of beating some of the major drawbacks of fixed rate accounts - namely falling behind the competition and having no access.

All that remains for me to say is that this cracking bond is a limited issue, which means it could be taken off the shelves at any time. If you like what you hear, I suggest you act quickly before it's too late.

Apply for the Britannia bond online

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*Note the bond is available at both Britannia and Co-operative Bank.

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