Abbey and A&L launch 4.01% fixed deal
Abbey and Alliance & Leicester have stormed into the best-buy tables with a two-year fixed-rate bond paying 4.01% AER.
While this rate pales in comparison to those offered at the back-end of last year, it offers some hope to savers who have seen the returns on their savings dwindle in light of the Bank of England base rate cuts.
Between October 2008, when the central bank first started cutting the base rate, to January this year the average interest rates on instant access savings accounts have fallen from 2.46% to 0.51%.
New fixed interest accounts have seen average rates drop from nearly 6% to just 2.35% while AERs on cash ISAs have nosedived from 4.36% to a pathetic 1.38%.
Earlier in February, the top fixed-rate savings account – ICICI Bank’s 12-month fixed-rate HiSAVE deal – cut its rate from 4.3% to 3.9%. While sub-4% rates were a blow for savers, the new deal from Abbey and Alliance & Leicester offers a (slight) glimmer of light at the end of the tunnel.
Unfortunately, the deal is only available to people with balances of at least £30,000. And, as withdrawals are subject to a penalty, savers must only consider this account if they are happy to lock their money away for two years.
The bond, which pays interest on a monthly or annually, can only be opened via an Abbey or Alliance & Leicester branch, and will only be available while funds last.
Reza Attar-Zadeh, director of savings and investments at Abbey and Alliance & Leicester, says: "This is a limited opportunity for customers to get the best fixed rate in the market - offering a guaranteed return for two years, four times higher than current base rate [1%]."
If you opt for your interest to be paid monthly, be aware that you won’t benefit from compounded interest and, therefore, the interest you’ll actually earn is 3.94%.
For people looking for a longer term fixed-rate savings account, Abbey and Alliance & Leicester’s offering sits firmly at the top of the best-buy tables.
However, if you don’t have the £30,000 initial deposit required to be eligible, Coventry Building Society’s three-year fix pays 3.75% AER on deposit of £1.
Derbyshire Building Society and Cheshire Building Society also pay 3.75% on their respective two-year bonds, although you’ll need £5,000 upfront to qualify.
Fixing for two or more years does carry an element of risk. While you can be confident that your rate will not change during this time, whatever the Bank of England base rate does, it could be that a few months or even a year down the line savings accounts become a lot more competitive.
Opting for a one-year fix is another option.
ICICI Bank’s HiSave deal remains the most competitive account in this sector, paying 3.9% AER on deposits of £1,000.
Elsewhere, Derbyshire Building Society and Cheshire Building Society again pay 3.75% AER on deposits of £5,000.
Or, FirstSave pays 3.6% AER on deposits of £1,000, while Birmingham Midshires pays 3.5% on deposits from just £1.
Remember that fixed-rate savings accounts, while offering security, are not suitable if you need to access your money or make additional deposits.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
Also referred to as the bank rate or the minimum lending rate, the Bank of England base rate is the lowest rate the Bank uses to discount bills of exchange. This affects consumers as it is used by mainstream lenders and banks as the basis for calculating interest rates on mortgages, loans and savings.
Where APR is the rate charged for money borrowed, Annual equivalent rate is how interest is calculated on money saved. The AER takes into account the frequency the product pays interest and how that interest compounds. So, if two savings products pay the same rate of interest but one pays interest more frequently, that account compounds the interest more frequently and will have a higher AER.