Are fixed-rate bonds worth investing in?

admin
11 June 2013

Q

I used to take out three and five-year fixed-rate bonds all the time because it was worth locking my money away for longer to get a really good rate. But now five-year bonds are little better than one-year products, should I try something else?

A

Fixed-rate bonds have fallen heavily over the past year, with savers being offered little above the rate of inflation (then 2.8%). For savers wanting to invest the money in a fixed-rate account, they can get better rates with a fixed-rate ISA.

Virgin Money is offering a five-year fixed-rate ISAs at 2.75% AER and unlike a savings bond, any interest you earn in an ISA is tax free. In this tax year, you can invest up to £5,760 in a cash ISA.

Find the best Cash ISA or savings account for you

Andrew Hagger of moneycomms.co.uk, says: "It's always a tough call to know how long to lock your cash away but, with rates at rock bottom, there is obviously a reluctance to tie your cash up for five years when you're only earning 0.9% more than with a one-year fix."

The relatively poor rates have led more consumers to invest their savings with peer-to-peer providers, where savers can get 3% for a one-year fix, 4% for three years and 5% for five years, he says.

Social lending offers savers the chance to become lenders to other borrowers (often small businesses), earning higher interest rates than the banks can currently offer.

By cutting out the middlemen with their expensive workforces, bonuses and branch networks, these operations – such as Zopa, RateSetter and Funding Circle – pair up savers with borrowers online in peer-to-peer (P2P) arrangements that aim to give 'savers' a higher return on their money.

Returns can be received in the form of interest or potential equity returns when they're lending to businesses. But one drawback to P2P lending is that deposits aren't protected by the Financial Services Compensation Scheme.

[Video:1]