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Savers should max out on cash ISAs instead of fixed-rate bonds

Interest on fixed-rate savings bonds has slumped. Savers are urged to use their annual cash ISA allowance first before looking elsewhere.


by Michelle McGagh on Dec 12, 2012 at 17:12

Savers should max out on cash ISAs instead of fixed-rate bonds

Making the most of your ISA allowance is even more important in today’s low interest rate environment as the returns on fixed-term bonds fall to an all-time low.

The rates offered by fixed-term bonds have fallen to historical lows across every term from one year to five years, meaning that if you haven’t maxed out your individual savings account (ISA) allowance for the year then you shouldn’t look anywhere else until you have done so.

Fixed-term bonds have typically rewarded customers for locking their money away, giving preferential rates that increase the longer the term of the bond.

However, research by comparison site shows that fixed-term bonds no longer look attractive.

The average one-year bond pays just 2.18%, compared to 2.77% 12 months ago, and you need to lock your money away for five years in order to beat inflation, which currently stands at 2.7%, as the average return is just 2.82%, compared to 4.08% last December.

Metro Bank offers 2.75% on its 18-month fixed bond but it is only available in its branches, which are all based in London and the South East.

Bank of London and the Middle East has an 18-month fixed bond offering 2.65% while the best one-year fixed bond is offered by United Bank UK at 2.55%.

Cautious savers who want a slightly better return but don't want to invest in stocks and shares should make sure they are using their full cash ISA allowance of up to £5,640.

The best cash ISA currently available is from Coventry building society with a 3.1% interest rates on its 60-day notice account.

M&S Bank offers 2.75% on its Advantage Cash ISA and you do not have to give notice to withdraw your money.

Sylvia Waycot of said you should use your cash ISA allowance before looking at fixed-term bonds.

‘Use up your ISA first, always use up your tax-free allowances and then put whatever is left where you can get the best rate,’ she said.

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4 comments so far. Why not have your say?

Rob Walker

Dec 12, 2012 at 18:26

The pivotal point of this article is that "Cautious savers who want a slightly better return but don't want to invest in stocks and shares should make sure they are using their full cash ISA allowance of up to £5,640.". Surely cautious investors who want a better return SHOULD NOT invest in a Cash ISA but in those lesser risk investments of a Stocks and Shares ISA. Nat West preference shares, ICG 6.25% bonds and various other investments are, if adequately diversified, a better choice than having to chase the latest rate deal every time the music stops. The difference between a 2.5% and 3% investment on £10,000 is, after all, only £50 a year and you can lose that on one expired parking meter!

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Tony Peterson

Dec 12, 2012 at 18:36

Once again, Rob, you have hit the nail on the head. Cash, as an investment in any form is, in the present economic climate, irrational.

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Hilary hames

Dec 12, 2012 at 19:19


I agree about the bonds you mentioned am interested in putting in ISA but, although I have bought new issues of retail bonds have never bought an existing one as I dont really understand how I know what the cost and value will be - presumably HL would quote a price and tell me their commission but, when I buy a new bond i know what the rate will be - how do I work out on an existing bond?

I could do with an article on this! Thanks for any enlightenment you can provide!

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moira levy

Dec 15, 2012 at 11:07

Ii agree with Hilary. Does anybody know anything about purchasing existing bonds eg does it cost more at the beginning or at the end?

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