Top 10 one-year fixed rate bonds

Returns from fixed-rate accounts have dropped off spectacularly, but one-year bonds are still a great choice for savers.

Earning a high fixed rate on your savings is just the ticket if you don’t have the time or inclination to keep on chasing the top returns, and you’re happy to lock your money away for a while.

Unfortunately, the returns on some fixed rate bonds have really suffered in the financial crisis. In the not too distant past, it was possible for savers to get guaranteed returns of 7% or more. Nowadays, even the long-term bonds can’t manage 5%.

The best five-year bond on the market today is the ICICI Bank 5 Year HiSAVE Fixed Rate Account, but it pays a frankly less than amazing rate of 4.75%.

You might think getting this rate guaranteed for the next five years sounds reasonable enough. But what happens if, during this period, the base rate recovers significantly and new issues of bonds start paying 7% plus again. Suddenly, you’re stuck with a really uncompetitive rate which you can’t do anything about until the bond matures.

So what’s the solution?

But I don’t think you should turn your back on fixed rate bonds completely because there are some pretty decent deals to be had if you know where to look. Long-term bonds may not be a great bet right now, but it’s a different story when it comes to short-term bonds - or more specifically, one-year bonds.

One-year bonds look like a sensible option for two reasons: firstly, your money will only be tied up for a maximum of 12 months. I suspect the base rate won’t climb dramatically during this time (although I could be wrong). This will reduce the risk that the rate you’re getting on your bond will fall siginificantly behind the competition before it has reached maturity.

Secondly, the best one-year bonds offer rates over and above the top easy access savings accounts, providing a reward in return for sacrificing access to your cash.

With this in mind, let’s take a look at the top ten bonds now:

Top 10 one-year fixed rate bonds

Several other bonds, not shown in the table, also offer a fixed rate of 2.75% including Principality Building Society 1 Year Fixed Rate Bond 175 and Cumberland Building Society 1 Year Term Account Issue 2.

Topping the table is the ICICI Bank 1 Year HiSAVE Fixed Rate Account which pays a rate of 3.10% on savings of £1,000 plus. To qualify, you’ll also need to open a HiSave savings account which your cash will be transferred to once the bond has matured.

The same rate is also available on the 12 Month High Interest Fixed Rate Bond from the independent Raphaels Bank for savers with at least £5,000 to put away.

One-year bonds versus easy access savings accounts

But how do these best-buys compare with the top easy access account? With the option to dip into your account as often as you like without penalty, the top rate is 2.80% from the AA Internet Extra Account (including a 12-month introductory bonus of 2.30%).

So, that means you could earn an additional 0.30% by choosing the most competitive fixed-rate bond. On savings of say £5,000, you would get an extra £15 in interest after a year.

Now you might think £15 isn’t much of an incentive for locking your money away but, don’t forget, the return from the bond is completely guaranteed. It won’t change at any point during the year-long term. The same can’t be said of the easy access account which operates a variable rate. If the AER on the best-buy did deteriorate - which invariably happens sooner or later - then the bond would provide an even better relative return.

I do think the margin between the rates paid on short-term bonds and easy access accounts ought to be wider to compensate savers for the lack of flexibility. But, with savings rates across the board depressed, there’s little chance of that in the near future.  

And I can’t deny there’s a chance a fixed rate of 3.10% today could slip behind the returns paid on new easy access accounts - and indeed new bonds - which are launched onto the market over the coming months. That said, I think it’s a gamble worth taking, but you’ll need to make up your own mind.

Just remember that savings bonds are usually limited issues which mean they can be withdrawn from the market at any time. So, if you do decide to take the plunge, I suggest you act quickly before the bond you like disappears.

Smaller savers

Some of the bonds shown demand pretty hefty opening deposits.

If you don’t have masses to put away, choose a bond with a lower minimum instead. The Northern Rock Fixed Rate Bond Issue 398 is ideal as it can be opened with just £1, while the Barnsley BS 1 Year Online Bond requires a smallish minimum deposit of £100. Both pay a fairly decent rate of 3%, which puts them ahead of the easy access best-buy.

Bonds to avoid

But you’ll probably have noticed the bottom three bonds included in my top ten don’t actually provide a better return than the AA Internet Extra Account. I recommend you steer clear of these.

After all, I fail to see the point of tying your cash up and earning a worse rate than you would otherwise get with full access to boot.

Compare fixed rate bonds at lovemoney.com

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