Bond or Fixed Savings Account?

hungry_jenny · 30 July 2009 at 11:23AM

Hi

I have a lump sum that I want to put away for a year and not touch. I had it in a bond last year which had a really good interest rate (has just matured), but the bonds out there at the moment have pretty low rates, about 3%.

I'm wondering whether I should just open up another fixed savings account (I have a couple already) to move the lump sum across that way on a monthly basis, where I'd get a higher rate of interest (eg the 5% rate at Halifax), or whether I should still just go for a bond?

Which way would I be earning more interest?

Any advice much appreciated.

Cheers

Jenny

OneADay · 30 July 2009 at 2:20PM

5% at halifax? - thats the regular saver I assume which requires monthly contributions (max £500 a month).

And if you have lump sum in hand already more than a few grand - thats not a good option.

I have opted for bonds for 90% of what I have - although only for 1 year max - such as the west brom were doing them at 4.3% a few months ago.

ICICI offer good rates for 12 months bonds compared to standard saving accounts - the ICICI hisave account etc - draw back is its a bit of a mess trying to get it started online but once its set up its ok.

Halifax do shorter period bonds for 3, 6 and 9 months, rates aint great but it gives option of getting your hands on the money and moving to higher rate after a shorter period of time.

gozomark · 30 July 2009 at 2:25PM

a bond, atleast in the sense you mean, is a fixed rate savings account

LongTermLurker · 30 July 2009 at 2:42PM

I think there's some confusion of terms. As gozo says, I don't think you mean a bond, I think you mean a "fixed term deposit", which pays a fixed amount of interest for a fixed term.

Now I think you are asking "should I put the lump sum into a new FTD, or should I drip feed it into a fixed-rate regualar saver account?" Oneaday suggests that's not a viable option, but it could be. I'm not up to speed on current rates, but there are a few options:

Open an A&L Premier Direct current account for the first £2500 - that pays 6% interest for the first year, but you have to feed in £500/month (and straight out of course, because you already have some liquidity in there while the monthly transfer goes through)
Find the highest paying instant access account and put the balance in there
Set up a monthly standing order for £500 to Halifax 5% RS
Find similar accounts with other providers and repeat #3

Doing the above will maximise your income. One other thing, consider an ISA for the first £3600. Although ISA interest rates are lower, remember the benefits will be felt long term through having to pay no tax.

dunstonh · 30 July 2009 at 3:24PM

but the bonds out there at the moment have pretty low rates, about 3%

Bonds have some very good rates at the moment. Not as good as a few months ago but you can still get 6 or 7%. However, fixed term deposits are not very good and it appears that is what you had before.

note: most "bonds" are not actually bonds but are misnamed by the marketing departments of the issuer because bond sounds good. Guaranteed equity bond, investment bond, savings bond, growth bond (post office really bad offender as its neither growth or a bond), corporate bond, income bonds etc.

moneylover · 30 July 2009 at 5:44PM

dunstonh wrote: »

Bonds have some very good rates at the moment. Not as good as a few months ago but you can still get 6 or 7%. However, fixed term deposits are not very good and it appears that is what you had before.

note: most "bonds" are not actually bonds but are misnamed by the marketing departments of the issuer because bond sounds good. Guaranteed equity bond, investment bond, savings bond, growth bond (post office really bad offender as its neither growth or a bond), corporate bond, income bonds etc.

How do you get/find out about the type referred to in the first paragraph - are these just available through financial advisers?

dunstonh · 30 July 2009 at 6:34PM

How do you get/find out about the type referred to in the first paragraph - are these just available through financial advisers?

The banks offer their own versions through their branch network but most of the bank ones are rubbish. The whole of market ones are available through IFAs. There are a couple of websites that offer a limited selection through them. A few allow you to buy direct but most don't offer any improved terms by going direct.

It is worth noting that they are not all created equal and they do have an element of risk and that risk can be quite significant with some but fairly low with others. You have to be careful not to be drawn in by high headline figures without understanding the level of risk.

It is possible that the time to buy these may be over soon. The terms have been getting lower with each tranche this year (with 8 and 9% available earlier in the year but only 6 or 7% available now - although an 8% one did get issued the other day).

LongTermLurker · 30 July 2009 at 7:07PM

dunstonh wrote: »

Bonds have some very good rates at the moment. Not as good as a few months ago but you can still get 6 or 7%.

It is possible that the time to buy these may be over soon. The terms have been getting lower with each tranche this year (with 8 and 9% available earlier in the year but only 6 or 7% available now - although an 8% one did get issued the other day).

Not knocking what dunston is saying, but it's worth pointing out that a bond is a loan to a particular company and if that company defaults, you could get nothing back. If the company goes into liquidation, I believe you get priority over shareholders, but you could still end up with little or nothing. And finally, the higher the rate, the higher the perceived risk of default. It's all about risk/reward; if you're happy to take the risk, you may be rewarded - then again, you may not!

I think dunston would agree that bonds should be bought as a diverse portfolio - you wouldn't lend all your money to one company. You can buy into a fund of bonds, which although not giving you the same exposure, provides built-in diversity by definition.

hungry_jenny · 30 July 2009 at 10:44PM

LongTermLurker wrote: »

I think there's some confusion of terms. As gozo says, I don't think you mean a bond, I think you mean a "fixed term deposit", which pays a fixed amount of interest for a fixed term.

Now I think you are asking "should I put the lump sum into a new FTD, or should I drip feed it into a fixed-rate regualar saver account?" Oneaday suggests that's not a viable option, but it could be. I'm not up to speed on current rates, but there are a few options:
Open an A&L Premier Direct current account for the first £2500 - that pays 6% interest for the first year, but you have to feed in £500/month (and straight out of course, because you already have some liquidity in there while the monthly transfer goes through)

Find the highest paying instant access account and put the balance in there

Set up a monthly standing order for £500 to Halifax 5% RS

Find similar accounts with other providers and repeat #3

Doing the above will maximise your income. One other thing, consider an ISA for the first £3600. Although ISA interest rates are lower, remember the benefits will be felt long term through having to pay no tax.

Thanks LongTermLurker - yeh that's exactly what I'm asking, whether to put the whole lump sum away for a fixed term (not more than a year) for fixed interest rate, or 'drip-feed' it into a fixed-rate saver account - I liked Halifax's option because you can change the amount each month (ie I could put the maximum amount in to start with, but lower the amount if I needed to over the coming months!).

I get a little lost when trying to look up options outside the normal high street banks though so will take a look at the ones you've suggested, thanks!

hungry_jenny · 30 July 2009 at 10:52PM

dunstonh wrote: »

The whole of market ones are available through IFAs. There are a couple of websites that offer a limited selection through them. A few allow you to buy direct but most don't offer any improved terms by going direct.

It is worth noting that they are not all created equal and they do have an element of risk and that risk can be quite significant with some but fairly low with others. You have to be careful not to be drawn in by high headline figures without understanding the level of risk.

Hi Dunstonh

Thanks for replying - sorry for being slow, but you've lost me a bit here - what sort of risks do you mean and what should I be watching out for?

Cheers

dunstonh · 31 July 2009 at 10:16AM

what sort of risks do you mean and what should I be watching out for?

The most obvious risk is that they are usually linked to the FTSE100 in provision of return of capital. Current ones for example have return of capital on maturity providing the FTSE100 is not 50% lower than the strike date (investment date). So, if its 49% lower you or higher you get your money back. If its 51% lower then you suffer a 51% capital loss.

There is also underwriter risk. If the underwriter of the plan fails, then you capital is at risk. That is why you need to make sure you use a financially strong underwriter. The provider of the plan is less important as they just market the plans but you need to rely on them to set the plan up correctly.

Bond or Fixed Savings Account?

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