In a fix – bond holders will see interest halve

Savers with one-year fixed-rate bonds are heading for an unhappy Christmas with the interest paid on their cash slashed by up to 40%, new analysis from MoneyExpert.com shows.

In December 2008 the average one year bond paid 4.6% before the Bank of England’s base rate slashing took hold - today the average rate is just 2.8%.

Last December the Bank of England base rate had been cut to 2% and was on the way down to 0.5% - but savers who moved to fix their deals at a higher rate with a one year bond still had options. There were 47 bonds paying 5% or more and 22 of these paid 5.5 per cent or more.

Now the average interest paid on a one year bond has fallen to 2.8% and savers will struggle to find deals paying significantly more than 3%. In fact there are just 17 products paying 3.5 per cent of more.

Those savers looking to renew their bond need to be careful to avoid low paying deals. Of the 151 products currently on the market 12 pay 2% or less.

This year savers with £10,000 in a one year bond with have generated an average of £460 interest before tax but next year this will fall to £280.

Pierre Williams, Head of Research at MoneyExpert.com, said: “Savers will struggle to generate anything like as much interest as they have done over the past 12 months. The beauty of bonds is that they pay a higher rate than most other forms of savings account but with rates so low savers will need significant deposits to generate a return. Interest rates will rise again but few are expecting to see a significant rise in 2010 so savers looking for a decent return are unlikely to miss out by locking their cash away for another 12 months.”

For those savers looking for a one year bond, the Post Office’s Growth Bond currently pays 3.7 per cent while C&G’s One Year Fixed Rate Bond pays 3.25 per cent. Other providers pay lower rates, Cumberland Building Society for example will pay just 0.5 per cent on a £500 deposit although this can rise to 2 per cent or more on deposits of £10,000 or higher. Barclays’ 1 Year Fixed Rate Savings Bond pays just 2 per cent but their offering on longer term bonds is more competitive.

For more information, visit moneyexpert.com.