More than half a million fixed-rate bonds are set to mature this month, and savers could be hit by hefty interest rate drops as a result.
A new report from HSBC shows that, of the 5.5m fixed-rate savings products due to end in 2010, the largest number will mature in July.
The bank has issued a warning to investors, suggesting they could see their returns fall off a ‘savings precipice’ thanks to the persistence of historically low interest rates.
Fixed-rate savings returns
In all, the fixed-rate bonds due to mature this year are worth £110bn, HSBC says. Its report claims that savers whose bonds have already closed during 2010 will have lost £772m in income, if they have simply reinvested their money in similar products.
The reason for this is the sharp decline in the Bank of England base rate, which has now stood at just 0.5% since March 2009. Savers who took out fixed-rate bonds before the central Bank’s aggressive rate cuts may have benefited from interest rates as high as 7% AER – unthinkable in today’s economic climate.
The rates on offer from table-topping fixed-rate bonds have dropped by up to 3.01%, according to HSBC’s data, and savers with 18-month, 2-year and 3-year bonds maturing this year are likely to be worst hit.
For example: an ‘average’ investor with an existing 18-month bond holding £24,782 would see their savings income drop by 46% over the next year and a half if they re-invested their cash in a new 18-month fixed savings account.
Best fixed-rate savings accounts
David Wells, head of pensions, savings and investments at HSBC, commented: ‘Those who want to re-invest savings from matured fixed-rate products into similar deals will find their income drops significantly – an especially nasty shock for those preparing for retirement.’
If you’re looking to open a new fixed-rate bond this year, it’s crucial to shop around for the best possible deal before locking your money away. Currently, the market’s leading rates tend to be offered on longer fixed-rate savings accounts of up to five years, while many one-year fixed-rate deals offer rates only slightly above those available on instant access savings accounts.
Before tying your cash up in a fixed-rate bond it’s important to be sure you won’t need to withdraw your money in an emergency. Should you need to close your bond early, it’s likely you’d lose a significant chunk of any interest earned on your savings.
In addition, there is a chance interest rates could climb again while your cash is secured in a fixed-rate savings account. Should this happen, you might feel you’re missing out – so it’s a good idea to think about this when deciding whether to fix your savings, and how long for.
Investing for the future
Alternatively, the lower returns on offer from fixed-rate savings deals may inspire some savers to consider investing in stocks and shares rather than cash. Typically, stocks and shares out-perform cash in the long-term – so if you’re looking to build up a nest egg for the future this may be a smart move.
However, if you’re new to investing read the Which? Beginners guide to investing before making a decision, and consider seeking help from an independent financial adviser before parting with any money.
Also, don’t forget you can invest up to £10,200 this year in a stocks and shares Isa, which will protect most of your savings income from tax. Read more about these in the Which? Stocks and shares Isas advice guide.
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