Providers battle it out for maturing NS&I fixed rate balances

Andrew Hagger of Moneynet.co.uk looks at the latest moves in the fixed rate savings market. At the end of October 2009, NS&I set the cat amongst the pigeons in the savings market when it launched a range of extremely competitive fixed rate bonds. The stand out product at the time was a one year fixed rate deal at 3.95%, priced at a full 0.20% higher than its nearest competitor.

Not surprisingly the combination of a table topping interest rate and the 100% security of funds (courtesy of HM Treasury) regardless of balance, proved an overwhelming success until the products were withdrawn just 24 days later.

This aggressive pricing stance adopted by NS&I attracted huge swathes of funds away from the banks and building societies, with the latter alone seeing a total of over £2 billion of balances withdrawn during October and November last year.

12 months on, these one year accounts are now approaching maturity and with no replacement products currently on offer from NS&I, this could help explain the extra activity Moneynet researchers have witnessed in the fixed rate bond market during the last few weeks.

Much of the focus has concentrated on the shorter term products over 1 and 2 years, with a number of providers throwing their hand in and jostling for best buy positions.

The latest launch from the Barnsley BS brand (part of Yorkshire Building Society) with its one year Online Bond, at 3.05% gross is the current market leader in what has become a very congested and competitive field.

There are at least seven other bonds paying 3% gross fixed for one year including new offerings from Post Office 3.00%, First Direct 3.00%, Bank of Cyprus UK 3.00% and now even Tesco Bank is keen for bond business with a new launch at 2.95%. Only last Friday Northern Rock launched a new 15 month fixed rate bond paying 3.05%

The extra 0.05% from Barnsley is a cute marketing move to gain that all important number one spot to maximise best buy coverage. With new products being launched on an almost daily basis, it wouldn't surprise me to see the 3.05% rate surpassed during the next couple of weeks.

Another point to note is that the gap between best buy instant access savings rates and fixed rate bond rates is now very slim, with Post Office paying 2.90% on its new Online Saver, just 0.15% below the top 1 year fix. It certainly doesn't seem much of a reward for losing access to your cash for 12 months, for example someone with a £5,000 balance would only be £6 better off (after basic rate tax) for choosing the fixed bond option.

With rates at a low ebb, aside from ISA's, fixed rate bonds still represent the best way to obtain the highest savings returns , as long as you are comfortable that you can manage without access to your cash for the duration of the term you choose.

However it's also worth highlighting that the difference between the best 3 year and the best 5 year fixed rate deal has recently narrowed to just 0.40% and is little incentive to lock your cash away for an additional two years.