Coronavirus: protect your savings from an economic downturn

16 April 2020

Fixed-term bonds remain competitive and guard against economic shocks 

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Britain could fall into its deepest recession in more than 100 years if the coronavirus lockdown continues into the summer, but some savings deals can help offset any impact on your money.

The Office for Budget Responsibility says that the coronavirus pandemic could shrink the economy by a third, with unemployment reaching 3.4 million. Chancellor Rishi Sunak has warned that there are tough times ahead for the UK economy.

This is more bad news for savers, who have had rough time in recent years and have had to search far and wide for a decent return on their money.

However, fixed rate deals currently offer competitive returns and will help offset cash against waves of likely interest rate cuts on savings deals.

Base rate slashed

On 19 March, the Bank of England cut the base rate for the second time in nine days to a record low of 0.1%.

This unprecedented move was done to help support the economy amid concerns about the coronavirus pandemic.

But it means more pain for savers, as typically banks pass on base rate cuts to their saving deals in full.

These interest rate cuts have not yet taken effect, but when they do savers are likely to see decreased returns on their cash.

No need to compete

The Bank has also introduced a new term funding scheme to help support small businesses which will put further downward pressure on interest rates.

From May this will let financial firms borrow at rock bottom rates from the Bank, allowing them to cut borrowing rates and increase lending.

However, this is unlikely to encourage banks to raise interest rates to savers, as they will have no need to attract funds from this group.

When the Bank last introduced a term funding scheme in 2016 savings rates fell across the board. With the base rate even lower this time, the impact on savers could be even worse.

Fixed-term bonds

With an economic downturn looming, it is worth considering a fixed-term bond to ensure a guaranteed return.

These pay a fixed interest rate over an agreed length of time and can help guard against any economic shocks or falls in interest rate from variable-rate deals.

Despite the Bank of England cutting the base rate, fixed-term bond rates have remained competitive.

Another bonus is that average fixed-term bond rates are currently higher than average cash Isa rates.

Since the Bank cut the base rate two-year fixed rate bonds have fallen from an interest rate of 1.23% to 1.12%, according to Moneyfacts.

This compares to the average two-year cash Isa rate, which has fallen from 1.19% to 1.01%.

Eleanor Williams, finance expert at Moneyfacts, says: “Fixed-rate bonds, while not unaffected, have been slightly more resilient to the impact of recent rate cuts and are likely to secure savers a higher return. Therefore it may be worth fixing a portion of their savings funds for a period of time that they are comfortable will suit their future plans.

“Fixed accounts should also protect borrowers from further cuts to rates that may occur in the coming months, and as ever, savers may wish to move quickly and secure their chosen account whilst it is available.”

Usually with fixed-term bonds you will have to pay a penalty if you want to close the account before it matures.

A number of providers are waiving fees for taking your cash out early, even for new deals.

Barclays, Santander and Gatehouse Bank have all removed penalties for customers affected by the coronavirus pandemic.

RCI Bank says it has never imposed financial penalties for closing fixed-term accounts early, while Leeds Building Society advises customers to get get in contact if they are experiencing financial problems.

Williams adds: “Although easy access accounts and variable rate savings deals have borne the brunt of the two recent base rate cuts, quick access to a portion of a savings pot may be a prudent measure during these uncertain times.

“It may be that a balance should struck between the higher returns offered on some fixed-rate accounts with the ability to access funds from a savings pot if an emergency arises.”

Best buys

The current best buy one-year fixed-term bond is from Vanquis Bank at 1.60%. Vanquis Bank also has highest paying three-year bond at 1.80%.

Both require an initial £1,000 deposit and can be opened and managed online.

The top-rated easy-access five-year bond is from Gatehouse Bank at 2.00%. This can be opened and managed online with a deposit of £1,000.

Gatehouse Bank is an Islamic bank and pays an expected profit rate instead of interest for religious reasons. While the rate is not guaranteed, no Islamic savings deal in this country has ever failed to pay the advertised rate.

Best fixed-term bond rates

Fixed-term bond

Term

AER

Opening and managing account

Secure Trust Bank

90-day notice account

1.48%

Online

Vanquis Bank

One-year

1.60%

Online

RCI Bank

Two years

1.65%

Online

Vanquis Bank

Three years

1.80%

Online

Gatehouse Bank

Five years

2.00%

Online

Comments

Vanquis Bank

I'd steer clear of them, good rate or not. I managed to lock my online account and needed to phone them to unlock so I could apply for a new one. I can confirm that it is administered by Newcastle Building Society and that they never answer their phones. My £30000 had a lucky escape and went to Hampshire Trust instead.

Gatehouse Bank 2%

The top-rated easy-access five-year bond is from Gatehouse Bank at 2.00%. This can be opened and managed online with a deposit of £1,000.

I am not sure this is correct as they don't have easy access accounts and nothing at 2%

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