The best fixed rate bonds for 2011

By DAN HYDE
Updated: 19:01 EST, 14 January 2011

Savers looking for long-term homes for their cash or a steady income have struggled in 2010 as bond rates have dropped.

Clever savings: Find the best fixed bond rates

Will they get a timely boost as 2011 hits full stride?

Much will depend on the Bank of England's base rate. If it rises from its record low 0.5% - where it has languished since March 2009 – there could be some hope for longer-term savers.

›› Check our independent savings rate tables now

But even if it does jump upwards, experts warn that savers shouldn't expect too much joy.

Michelle Slade, savings expert at Moneyfacts.co.uk, says the current bond rates have actually become unsustainable for providers - many are now loss-making.

She says: 'Once base rate does start to increase, providers may opt to only pass on part of the increase to savers.'

So where can savers turn to generate some extra income in 2011?

Unfortunately, savers now have to fix for a fairly lengthy periods to get a healthy rate. And that means that if rates do rise significantly in the meantime, they'll lose out.

One-year bonds don't look particularly good value, compared with instant access accounts. The best available are FirstSave's 3.25%, Barnsley Building Society's 3.2% (2.56% after basic rate tax) and Northern Rock's 3.15% (2.52% after basic rate tax).

These are just a smidgen above the best instant access accounts at 2.9%. Savers must ask themselves if its worth foregoing the ability withdraw cash at convenience for a 0.35 percentage point boost.

Two-year bonds are slightly better-priced. A 3.65% rate is available at the Post Office (2.92 after basic rate tax; 2.19% after higher rate tax).

Santander offers 3.55% but only on investments of more than £25,000. After tax is deducted, the account pays 2.84% to basic rate taxpayers and 2.13% to higher rate taxpayers.

On a three-year basis, Coventry Building Society offers 4.15% (3.32% after basic rate tax and 2.49% after higher rate tax). Alternatively, the Post Office, Northern Rock, Yorkshire Building Society, and Sainsbury's Bank all offer 4% (3.2% after basic rate tax and 2.49% after higher rate tax).

For the very highest returns, savers need to fix for five years. There, Coventry Building Society offers a tasty 4.75%. That's 3.8% for basic rate taxpayers and 2.85% for higher rate taxpayers.

It's a gamble to fix over that length of time, but very few accounts match up. Some experts are advising savers to steer clear of fixed rate bonds in anticipation of rates rising in the first half of 2010.

Others, such as Andrew Hagger from Moneynet.co.uk, say that savers should split their cash between instant access and shorter-term fixed rate bonds to get a better return but retain the ability to take advantage of a rate rise.

Check out our round up of the best instant access accounts for 2011 for more info.