Fixed rate lifeline

By SYLVIA MORRIS, THIS IS MONEY AND DAILY MAIL SAVINGS EXPERT
Updated: 19:00 EST, 6 August 2003

AS RATES continue plummeting, savers are being given a helping hand by fixed rate deals.

Some banks and building societies are coming out with exceptional deals that allow savers to fix the rate of interest they earn close to 3.5% base rate and above the 2.9% inflation rate.

Last week, Birmingham Midshires came out with a series of bonds on which you can earn 3.32% after 20% savings tax (4.15% before tax) with a choice of fixing the term and rate for one to five years on a minimum investment of £1.

Nationwide's two-year fixed rate bond, out last week, pays the same rate fixed for two years on a minimum investment of £1, while Woolwich's latest bond pays 3.28% (4.1%) for 18 months on £500 or more. These were followed by Britannia Building Society with a top 3.44% (4.3%) fixed for three years.

Next week, Bradford & Bingley will launch a three-year bond at 3.4% (4.25%). Northern Rock and Yorkshire Building Society are among the top payers, too.

These bonds look particularly good value with interest rates predicted to fall further. And while banks and building societies say they could protect savers next time round, those in variable rate accounts are unlikely to get away completely unscathed.

Jonathan Loynes, chief UK economist-at Capital Economics, says: 'We expect the Bank of England base rate to fall to 3% by the end of the year. A before-tax rate of 4.15% is reasonable, but looks better on a two rather than three-year term.

'We expect base rate to be less than 4% for the bulk of the next two years, but trending upwards over the period.'

At HSBC, economist John Butler says: 'I expect rates of 3.25% by the end of the year, and 2.75% in the first half of next year.'

Guaranteed income bonds are an option for taxpayers, particularly higher-rate payers with sizeable sums to deposit. These bonds, run by insurance companies, offer a fixed rate of interest during the term, with your capital back at the end.

Unlike bank and building society bonds, though, income is paid out after basic rate tax has been deducted and cannot be reclaimed from the Inland Revenue.

For basic-rate taxpayers, the income does not have to go on your tax form, so helps you avoid the age-allowance trap where once your income reaches £18,300 you start to lose the age-related personal allowance at the rate of £1 for every £2 of income over this level.

Higher-rate taxpayers can defer paying further tax for up to 20 years, as long as they earn 5% or less from their bonds. They currently earn between 2.5% and 3.4% after tax.

If you decide on guaranteed income bonds, then go to an independent adviser who will rebate some of the commission that life insurance companies pay for selling the bonds to help boost your income.

You will be given no such rebate if you go directly to the life insurance company. These top-rate deals kick National Savings' two-year Savings Certificates out of the best buys. The current 19th Issue Two-Year Savings Certificates pay a tax free 2.25%, with the interest added at maturity. This is equivalent to earning 3.75% before tax for a higherrate tax payer and 2.81% for basic rate payers - well below the best rates.

Colin Jackson from independent advisers Baronworth, which specialises in guaranteed income bonds, says: 'We recommend you fix in at three years at the most. These bank and building society bonds look good value, but guaranteed income bonds can offer a better deal for some investors.'