Fixed-rate deals may be peaking

By SYLVIA MORRIS, THIS IS MONEY AND DAILY MAIL SAVINGS EXPERT
Updated: 19:00 EST, 15 June 2004

MONTHLY income seekers can earn more than 4% before tax in easy access accounts and 5.47% if they are willing to tie up their money for more than a year.

But those in maturing National Savings Pensioners' Bonds should look for better deals. The Government-backed bank pays extremely poor rates compared with its rivals.

As the Bank of England continues to raise the base rate, you can expect higher rates on variable-rate accounts in the next few months. The base rate is predicted to rise from its current 4.5% to 5% or even 5.25% by the end of the year.

Peter Spencer, economic adviser to accountant Ernst & Young's Item club, which uses the same economic model as the Treasury to make its predictions, says: 'We expect the base rate to be at 5% by September or October. It will stay there for a few months while the Bank of England assesses consumers' reaction. Then it could go to as much as 5.5%.'

At Capital Economics, Jonathan Loynes says: 'We expect rates to rise to 5.25% by the end of 2004.'

But fixed-rate deals could be nearing their peak. The rates in money markets, where banks, building societies and insurance companies go to get their fixed-rate deals, already reflect expected higher future rates.

Slightly better deals might come along, but savers can now fix at future rates on bank and building society bonds. You'll effectively be earning the higher rates for months before others get them.

Guaranteed income bonds from insurance companies offer better rates to taxpayers with sums of £20,000 or more. They are not suitable for non-taxpayers as the income is paid out after tax has been deducted and you cannot claim it back from the Inland Revenue.

National Savings has yet to react to the rising money markets and offers exceptionally poor value.

Its one-year Pensioners' Bond, series 24, on sale now, pays just 3.4% (4.25% before tax), well below the 4.25% (5.3%) plus from well-known banks such as Co-op Bank, Northern Rock and Birmingham Midshires.

Its two-year Pensioners' Bond is also poor value. Two years ago, when base rate stood at 4%, National Savings paid its pensioners 3.64% after tax (4.55%) fixed for two years.

National Savings is offering those with bonds maturing now a lower 3.56% (4.45%) when base rate is at a higher 4.5% and rising.

On its five-year Pensioners' Bond, National Savings is asking pensioners to fix in at 3.76% (4.7%), a whole percentage point less than Northern Rock before tax.

With this wide gap, pensioners will lose out on £10 of interest before tax every year on each £1,000 they have invested for five years.

• Joy Strong took out a one-year fixed rate bond with Birmingham Midshires recently. Joy, who ran her local Sue Ryder charity shop in Newark before she retired, says: 'I am looking for monthly income to boost my pension. Some banks pay much less if you want to take your interest monthly rather than just once a year, but Birmingham Midshires does not. I went for a one-year bond because I don't want to tie my money up for too long, especially when rates are rising. I have sufficient money in easy access accounts to keep me ticking over, so I will not need the money to spend in the next year.' Birmingham Midshires, part of the Halifax, pays 4.38% after 20% savings tax (5.47% before tax) on £1 or more. You earn £438 interest a year after tax for each £10,000 invested, equivalent to £36.50 a month. This is a much better deal than National Savings, where you earn nearly £100 less. At 3.4% (4.25%) you earn £340 a year - which works out at £28.33 a month.