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 Moneyfacts.co.uk 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 Moneyfacs.co.uk 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.