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Savings: the interest rate gap Go compare with our comparison table

Savings: the interest rate gap

28 June 2011 / by Rebecca Sargent

Do you know when interest rates are going to rise? Is your fixed rate bond nearing maturity? Are you prepared for the interest rate drop?

A recent report from HSBC revealed that 4.7 million fixed rate bonds are due to mature this year, and given that three years ago, the Bank of England base rate stood at five per cent, millions of people could be in for a hit on their income.

What are your options?

Inflation is at 4.50 per cent, slowly but surely eroding the value of income, many businesses have frozen salaries, and the Bank of England base rate remains at 0.50 per cent. You can't afford to take a cut in income from your savings. What are your options?

Sadly the outlook for savers is pretty gloomy in the short term. It doesn't look like the Bank of England is going to increase the base rate any time soon, and when it does, it is likely to be at increments of 0.25 per cent.

On the other hand, the best interest rates are available on longer term fixed rate bonds. But if you fix for more than two or three years you could end up losing out even more if interest rates do happen to shoot up.

Your options include:

Instant access

Move your savings into an instant access savings account, like the ING Direct Savings Account paying 3.00 per cent and wait until interest rates rise.

The downside to this is that many instant access accounts operate with a bonus rate so you will need to keep an eye on your rate and be ready to switch when the bonus runs out.

Short term fixed rate bonds

This is a popular option with visitors to Fair Investment Company at the moment, particularly fixed rate bonds like the Santander 2 Year Fixed Rate Bond offering four per cent, and the Barnsley Building Society 1 Year Online Bond offering 3.50 per cent.

Fixing for a shorter term, is also a way to hedge your bets against interest rate rises, while still benefitting from interest rates above those available on instant access savings accounts.

Take more risk

One of the only ways to achieve an above inflation rate of return or a rate similar to those available three years ago is to take on more risk.

The obvious downside to taking more risk is that you may have to put your savings at risk. But there are options that protect your savings while offering the potential for inflation beating returns.

The latest structured deposit plan from Meteor offers this opportunity. The plan comes with capital protection (although, like with any savings account you could still lose your money if the financial institution backing the plan (RBS) becomes unable to repay your money).

Plus it aims to provide you with an annual income of 7.50 per cent, dependent on the performance of the FTSE 100.

It is important to note that with this plan the income is not guaranteed, in a similar way to other investments that aim to provide an income.

However, unlike other investments, structured deposit plans protect your capital, and in the event that the financial institution backing the plan is unable to repay your money, you will normally be eligible for the Financial Services Compensation Scheme (FSCS) up to £85,000 per person.

Whatever you choose to do with your savings, it is worth keeping in mind some of the options discussed above. Make sure that you fully understand any product and that it is right for you and your circumstances before deciding where to invest your savings.

© Fair Investment Company Ltd

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