National Savings bond set to spark rate war

National Savings bond set to spark rate war

National Savings & Investments, the government's savings body, has launched a table-topping one-year 3.95% fixed-rate savings bond.

With interest rates looking likely to stay low – well into 2011, according to the Centre for Business and Economic Research – the deal is likely to offer enough of a "premium" to attract savers otherwise considering top-paying instant-access accounts, and could spark a pre-Christmas rate war.

Its one-year Guaranteed Growth Bond (Issue 48) pays the 3.95% on a minimum of £500 if the money is kept in for 12 months. It has shot to the top of Moneyfacts' one-year best-buy tables. A slightly lower-paying Guaranteed Income bond offers 3.85% and pays income monthly. If you pull your cash out in an emergency, you'll pay a 90-day interest fine.

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Kevin Mountford of price comparison website Moneysupermarket.com says: "Banks are keen to grab their market share. At 3.95%, there's enough of a premium to the roughly 3% average on instant access, to lock away your money for a year.

"If we don't see any Bank of England base rate moves until this time next year, it's a good deal."

Base rate has been stuck at 0.5% since March, provoking much woe for savers with variable instant-access accounts, as providers chopped their rates, but sparking joy for many millions of mortgage holders who are on variable rates.

However, after the threat of financial implosion receded this year, and as investor confidence crept back, banks and building societies began to offer ever higher rates on fixed accounts to tie in customers' cash and – critically – shore up their battered capital bases.

The average fixed rate for a one-year savings bond has been rising for most of the year, according to figures supplied by Moneyfacts.

In March, it stood at 2.78%, rising to 3.23% by the beginning of October. By comparison, the average on a variable no-notice savings account has dropped from 0.83% to 0.79%.

"Nobody knows where the base rate is going, despite signs that interest rates could stay low for a while, and so this 3.95% NS&I offer is very competitive," says Michelle Slade of Moneyfacts..

The best no-notice account, says Which?, is the Citibank Flexible Saver. It pays 3.3% to new savers but includes a 2.25% bonus for one year.

As a decent alternative for instant-access accounts, you could try High 5 from Investec which pays the average of the five highest savings rates in the market, currently 3.29% AER (as calculated by Moneyfacts).

Savers prepared to park their cash for longer than one year can earn even greater interest.

"The AA is offering 4.35% on a minimum of £500 if you put away your money for two years," Slade adds, while the UK subsidiary of Indian bank giant ICICI offers 4.7% over three years.

David Black at Defaqto financial analyst warns that it is crucial to use up your individual savings account (Isa) allowance in an instant-access account before putting money elsewhere.

"Isa tax-free status will boost your interest earnings further," he says.

First Direct currently offers 3% on its cash e-Isa, while Standard Life has a 2.65% deal; both allow instant access and investments from £1.

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