Time to snap up fixed rates

By SYLVIA MORRIS, THIS IS MONEY AND DAILY MAIL SAVINGS EXPERT
Updated: 05:43 EST, 15 June 2005

COULD now be the right time for those seeking a monthly income from their investments to snap up fixed rates before they fall too far?

Although the Bank of England left base rate on hold again last week - it has been stuck at 4.75% for ten months - many institutions are reducing their fixed rates.

A total of 27 out of 37 economists surveyed by Reuters expect the next move in interest rates to be downwards as consumers lose their appetite for spending.

But there is a wide discrepancy as to when they believe the first cut is due. Some say as early as August but others opt for as late as next spring.

Jonathan Loynes, chief UK economist at Capital Economics says: 'We expect base rate down at 4% by the end of the year and further falls next year to 3.5%.' And Andrew McLaughlin, chief economist at RBS, says: 'The first cut to 4.5% could come in November followed by another 0.25% cut by spring of next year.'

So what are savers supposed to do? If the majority proves to be right and rates fall further, then today's deals will look attractive. If you want a fixed rate, then make sure you go for a top payer.

While some banks and building societies are paying around 5% (4% after 20% savings tax), some leading High Street names are paying much less.

For example on one, two and three-year fixed-rate deals for monthly income, Barclays is paying just 4.12% (3.3%) on balances up to £10,000, less than the 4.25% (3.4%) you earn with the Government-backed National Savings. At Abbey the rate is just 4.35% (3.48%).

For savers looking for a decent monthly return on easy access money, there is now a much wider choice. Northern Rock offers an attractive deal for the over-50s with its branch and postal account Silver Savings. It pays 5.1% (4.08%) on a minimum £10,000.

Other top monthly income accounts have been launched by Newcastle, West Bromwich and Coventry building societies. The Newcastle 55 Base Rate Tracker, open to those aged 55 or over, pays 4.5% (3.6%) with a guarantee to track base rate until 5 April 2010.

West Bromwich's Oak account pays 4.17% (3.34%) on a minimum £10. The account is open to those aged 60 and over who have their pension paid into the account.

It comes with a guarantee that the annual before-tax rate will pay base rate less 0.5% until at least 31 December.

Coventry Sixty-Plus Saver Issue 2, minimum £500, pays a better rate at 4.65% (3.72%) plus a 0.72% before-tax bonus for the first year, bringing the rate up to 5.37% (4.3%).

But you can only move your money over gradually, as the most you can put into this account is £2,000 a month. The society pledges the annual rate will at least match base rate until June 30, 2010.

The fall in fixed rates also has ramifications for those savers who have been cushioned in National Savings Pensioners' Bond Series 15, who will get a harsh dose of reality from next week as their five-year bonds start to mature.

These bonds, which were on sale from June 23, 2000, pay 5.75% before tax, well ahead of the current 5-Year Pensioners' Bond, Series 43, at 4.25%.

So pensioners who roll their money over into the new issue will see a dramatic cut in incomeandmay wish to investigate fixed-rate alternatives before they are locked into their fresh bond agreement.

Five years ago, when those bonds were on sale, base rate was at 6% and the NS&I bonds looked like a good deal. Today, the best fixed-rate savings you can get come in at just under 5% before tax and so the bonds are less competitive.

So with fixed rates expected to dip over the coming months, it may be preferable to lock into a fixed rate deal before they fall further.

• RETIRED manager John Edwards, 74, bought a one-year fixed-rate bond from Yorkshire Building Society last month. He is using the capital saved over his working life to provide an income to boost his pension.

John, from Frinton-on-Sea in Essex, says: 'Yorkshire pays a good rate and lets you take monthly interest from the bond and I have to tie my money up for only one year. I was not keen to tie it up for longer but I like the idea of a fixed rate.'

Yorkshire currently pays 3.76% after savings tax fixed for a year.