Savers would be "mad" to lock up their money in the Leeds Building Society 10-year fixed-rate monthly income bond, experts have warned.
The building society claims its market-leading bond – paying 4% (4.07% gross AER) – offers eight times more in interest than the current Bank of England base rate. However, with the prospect of rising interest rates and accounts paying almost as much over far shorter terms, market commentators have said there are better deals to be had elsewhere.
The bond has a minimum deposit of £10,000 and no withdrawals are permitted over the 10-year term. Interest is paid monthly at £33 on the minimum deposit.
"We know there are savers seeking longer-term investments and at the end of the bond's 10-year term, customers will have benefited from an income totalling 40% and still have all their capital," said Kim Rebecchi, Leeds Building Society's sales and marketing director.
But Jason Hollands, managing director for business development and communications at BestInvest, does not share her enthusiasm.
"While 4% seems attractive in the current environment of ultra-low interest rates, rates are almost certain to rise over the coming years, possibly to around 2.5% by 2017 in the view of some analysts.
"Then of course you need to bear in mind that the Bank of England's target rate of inflation is 2% and interest earned may be subject to your marginal rate of tax. I think it's mad to lock your money up for a decade in a product like this," he said.
Chartered financial planner Patrick Connolly at Chase de Vere added that the bond isn't available as a New Isa. "What this means is that the effective interest rate for a basic-rate taxpayer, after tax, becomes 3.2% and for a higher-rate taxpayer it is 2.4% per year."
Personal finance expert Andrew Hagger of Moneycomms.co.uk added: "It's when you realise that you have to lock your funds away for 10 years to get a half decent return that peer-to-peer looks even more tempting – with RateSetter this morning offering 4.5% for three years and 6.4% for five years, plus Zopa offering 5.2% for five years."
However Anna Bowes, director at Savingschampion.co.uk, says the account "certainly stands out from the crowd" and could prove popular for those who are looking for a stable income over as long a term as possible. "But it should be noted that the account pays monthly interest only and must be paid away, so cannot be compounded," she adds. "While you cannot access your funds during the term, the account could be a good addition to a balanced savings portfolio, with other accounts that do allow access."
Darius McDermott, managing director of Chelsea Financial Services, points to other alternatives for savers and investors with 10-year time horizons.
"If you are willing to take some more risk, then there are a few Elite Rated funds we would recommend. For bond funds, the 24 Dynamic bond pays 4.95% currently, Invesco Perpetual Monthly Income Plus has a yield of 5% and Jupiter Strategic Bond is yielding 5.3%," he said.
For investors looking for property funds, he added that Henderson UK Property has a yield of 3.7%; while in the equity income space, Fidelity Enhanced Income has a yield of 6.35% and Premier Monthly Income has a yield of 4.47%.
Though he pointed out that, of course, yields aren't fixed.
More information on the funds can be found at Chelsea's new fund comparison tool at fundcalibre.com, which launches on Saturday 26 July.