Investors urged to check small print of fixed rate bonds as some end up in holding accounts paying pitiful interest

News - Funds

Written by Ray Clancy

Thursday, 01 July 2010 09:41

Failing to move to a better deal when fixed rate bonds mature is costing investors hundreds of pounds in lost interest per £10,000 invested, it is claimed.

Fixed rate bonds have been in vogue for a number of years, offering investors a better return on their savings compared to the equivalent easy access savings account. However, many providers will move the funds into a holding account paying little interest when the bond matures, according to comparison site moneysupermarket.com.

It says that failing to check the small print could result in losing hundreds of pounds of interest when the bond matures. As an example it says that the top paying four year bond in June 2006 from Cheshire Building Society paid a healthy 5.28%. But if you fail to take action when the bond matures you could see your funds move into an account paying just 0.10%, costing £518 in lost interest on a £10,000 balance over a year.

Each provider has differing rules on how they treat fixed rate bond holders once the account matures. Some providers will simply give investors their money back in order to reinvest, while others will place the balance in an equivalent bond. However, the worse case scenario is when some providers automatically deposit the cash in a default account.

A provider should notify you prior to maturity to tell you of your options, said Kevin Mountford, head of banking at moneysupermarket.com. ‘Many savers will have investments sitting in bonds paying good rates of interest as there was, and still remains, healthy competition among banks and building societies to secure longer term investment balances. However, it is easy to lose track of time and forget that your bond is coming to maturity and the consequences of not taking action can really hit you in the pocket,’ he explained.

‘Savers should make sure they contact their provider to establish the date when their fixed rate bond will mature and be prepared to switch to an account paying higher interest as quickly as they can, particularly if your bond has already matured and the money is left lingering in a poor paying interest account,’ he added.

Although it is unlikely investors will find rates as high as was paid four or five years ago, fixed rate bonds continue to give good levels of returns at a time when interest rates are low, the company points out. The best rate over five years is currently 4.75% and over one year it is 3.1% compared to the best easy access account which pays 2.8%, it added.

‘Savers should consider what they need from their account and whether they need an income from the monthly interest accrued; in which case another high interest fixed rate bond could be a good option,’ said Mountford.

‘However, for those that may need access to their money, an easy access account with a fixed rate bonus may be better suited to them. Banks and building societies are currently offering some attractive savings deals by including short term bonus rates, typically for 12 months,’ he explained.

‘Savers still need to be mindful of the bonus expiry date as once it is removed the interest paid on the account may be greatly reduced. The best easy access savings account is currently the AA Internet Extra, offering a rate of 2.8%, which includes a bonus of 2.3% on balances over £1,000. If you are considering locking your money away for longer, the leading fixed rate bonds have terms of between three and five years, and savers need to be sure they can lock away their money for this long,’ he added.

He also pointed out that the danger of locking your money away for between three and five years is that you could find yourself stuck on an uncompetitive rate when interest rates start to rise again.