Skipton launches seven-year fixed rate bond paying 3.5%!

You can earn a fixed rate of 3.5% with Skipton's unique seven-year fixed rate bond. But should you lock-up your savings for so long?

Skipton Building Society has launched a new fixed rate bond paying a whopping 3.5%.%VIRTUAL-SkimlinksPromo%
It's a leading rate, but savers will have to keep their cash locked up for seven years to benefit from it.

Currently no other provider is so bold to ask for such a long-term commitment.

Unique deal
The Skipton seven-year fixed rate bond is unique in the market at the moment as it is the longest lasting fixed term available on a cash savings account.

Traditionally banks and building societies tend to offer savers a maximum five-year fixed rate term.

It's been five years since there was a bond offering a term of longer than five years, so those looking for a long-term home for their savings have had a big wait.

The new Skipton bond will only have a short shelf life as it is a limited edition account that could be withdrawn at any time.

Only one account is permitted per customer, but savers can add to the initial deposit as long as the issue remains open.

Weighing up the gamble
A fixed rate bond guarantees a fixed return for the duration of the term, which safeguards your savings against falling rates. But if rates start to rise during the term you will lose out as you won't be able to take advantage by moving your money.

With hindsight it's clear that fixing has worked for last year's investors. Here's a table showing how the average rates on fixed rate bonds have dropped in the last 12 months.

Accounts can be opened in branch or over the phone and you can invest from £500 up to £10,000.
Interest is calculated daily and paid either annually or monthly, but you won't be able to make a withdrawal until the bond matures.

Who could benefit?
For those chasing the highest returns with enough money to spare the Skipton deal is the best going.
The seven-year bond might be particularly useful for those approaching retirement who want a low-risk investment at the best possible rate or those who have a lump sum they want to use to supplement an income with the monthly interest on offer.

However, the seven-year bond has limitations like an unusual £10,000 cap on investment for single applicants and £20,000 for joint. Shawbrook Bank's leading five-year deal which pays 2.90% either annually or monthly allows a maximum investment of £2 million. And of course you won't be able to access that cash before maturity.

Why should you fix?
In general locking your money away for longer gets you access to a better rate.
Here's a table showing how the return on fixed rate bonds get better the longer the fixed-term period is.

Term

Account

Interest rate AER

One-year

Kent Reliance BS One-Year Fixed Rate Bond Issue 13

2.05%

Two years

Kent Reliance BS Two-Year Fixed Rate Bond Issue 15

2.35%

Three years

ICICI Bank UK HiSAVE Fixed Rate Account

2.55%

Four years

Shawbrook Bank Four-Year Fixed Rate Bond Issue 6

2.55%

Five years

FirstSave Five-Year Fixed Rate Bond / Shawbrook Bank Five-Year Fixed-Rate Bond Issue 7

2.90%

Seven years

Skipton Seven-Year Limited Edition Fixed Rate Bond

3.50%


As you can see committing your cash to a seven-year sentence will get you a rate that is 0.60% better than the next best deal.

On the surface it looks like a better offer, but the longer the fixed rate period the bigger the gamble.

Weighing up the gamble
A fixed rate bond guarantees a fixed return for the duration of the term, which safeguards your savings against falling rates. But if rates start to rise during the term you will lose out as you won't be able to take advantage by moving your money.

With hindsight it's clear that fixing has worked for last year's investors. Here's a table showing how the average rates on fixed rate bonds have dropped in the last 12 months.

Term

Average rate 2012

Average rate today

Percentage change

One-year

2.70%

1.60%

-1.1%

Two years

3.34%

1.85%

-1.49%

Three years

3.39%

2.05%

-1.34%

Four years

3.73%

2.06%

-1.67%

Five years

3.88%

2.41%

-1.51%


Source: Moneyfacts.co.uk

Those that locked into fixed rate bonds last year would have benefitted as rates have plummeted.

Four-year bonds have fared the worst over the past year, falling by 1.67% on average. So those that opened an account in 2012 are likely to be pretty chuffed with themselves at the moment. But they still have to wait three years to fully understand how well their choice plays out.

Longer term investments tend to iron out peaks and troughs in interest rates over time. Here's what average five-year bonds have paid over the past five years.

Term

Average rate 2008

Average rate 2009

Average rate 2010

Average rate 2011

Average rate 2012

Overall average for five-year term deals

Five years

5.31%

3.74%

4.12%

4.20%

3.88%

4.25%


Source: Moneyfacts.co.uk.

If you had locked into a five-year rate back in 2008 you might still be enjoying returns of 5.31% on your savings rather than an average 2.41% if you opened an account now.

Overall the average rate of five-year bonds over the past five years has been 4.25%, so it has worked out to be a good investment over the timeframe.

But hindsight isn't the best tool to make a decision now. If you are concerned with getting the best return for your money, you will have to try to predict what is going to happen in the future.

Future proofing savings
We are currently experiencing a historically exceptional period of low interest rates, partly because of the record low Bank of England base rate but also because of the effects of the Funding for Lending Scheme. Some predict these will remain low for some time and fall further still, in which case locking into a good rate now would be a good move.

But there are signs that saving rates could be making a recovery. Just last week three providers went against the grain and put up the returns on accounts. Read Shock! Some savings rates are actually going UP for more. If this becomes a long-term trend it might not be the best time to lock-in for so long.

For the latest fixed rate deals check out: The best fixed rate savings bonds.

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Skipton launches seven-year fixed rate bond paying 3.5%!

If, like many Britons, you have failed to save the cash you need to maintain a comfortable standard of living in retirement, one option is to sell your home and downsize to a smaller property, using the money leftover to cover your living costs.
If moving out of the family home is too much of a wrench, however, the good news is that equity release schemes allow you to stay in your house or flat while still using the equity built up in it to provide some extra cash. The downside of the schemes, which work a bit like mortgages, is that you may not have much left to pass on to any children or other relatives.
But that's a small price to pay for a reasonable standard of living. For more information, try Age UK on 0800 169 6565.

Choosing the right annuity can have a significant impact on your retirement income. And as with most pensions, you automatically have what's called an 'open-market option' (OMO), you can scour the market for the highest annuity rate.
It is worth checking what your pension provider is offering first, though, as some companies offer guaranteed rates for existing customers that are likely to beat those available elsewhere. The Pensions Advisory Service on 0300 123 1047 is a good place to get some free advice.

On retirement, most people convert their pension fund into a guaranteed income annuity that pays out the same amount every month for the rest of their lives.
However, you can also choose an increasing annuity that pays out smaller amounts in the first few years but offers larger payments further down the line. This may prove a wise move if the rate of inflation remains at over 2%.

It is now easier to work later in life because the "default retirement age" has been scrapped.
People approaching retirement age and worrying about money can therefore choose to work for a few years longer - potentially transforming their financial situation. Other than the extra income from working, these people can look forward to higher state pensions, and higher annuity rates due to their greater age.
They can also benefit from bigger tax allowances and the fact that they no longer have to pay National Insurance contributions. Check out this nidirect website for more details.

You could get a much better rate with an impaired-life annuity if you have a medical condition that is likely to reduce your life expectancy.
Incredibly, even snoring, which is a common symptom of Sleep Apnoea could have an impact.
According to figures from MGM Advantage, a man with this condition could receive an extra £12,000 retirement income over the course of their retirement - or £571.44 extra money each year. Click here to find out more.

To maximise your retirement income, it is vital to ensure that you are receiving all the benefits to which you are entitled. These include the basic State Pension, and in some cases, the additional State Pension.
If you are on a low income, you could also qualify for the guaranteed element of Pension Credit, while those with some savings may get the savings element of this benefit. For more information about these and other benefits such as the Winter Fuel Payment, click here.

Many older couples rely on the pension income of one person - often the man. Should that person die first, the other person can therefore be left in a difficult position financially.
One way to prevent financial hardship for the surviving person is to take out a joint life annuity that will continue to pay out up to 67% of the original payments to the surviving partner should one of them die.
The disadvantage of this approach, however, is that the rate you receive will be lower. Again, the Pensions Advisory Service on 0845 601 2923 is a useful first port of call if you are unsure what to do.

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