Savers' 'winter of discontent' continues as fixed bond rates hit new lows

Updated

The typical fixed bond rates on offer have plunged to new lows in a further blow to savers, according to a financial information website.

Moneyfacts.co.uk said it has recorded a "staggering" 222 rate cuts to the fixed bonds on the market in the first two months of 2016, with the highest reduction at 0.74%.

The spate of cuts, which come after bond rates had started to creep upwards slightly last year, means that the average one-year fixed rate bond pays 1.34% interest, down from 1.5% six months ago.

The average three-year fixed bond pays 1.86%, down from 2.09% six months ago, while over the same period the typical five-year fixed-rate bond on offer has dipped from 2.64% to 2.46% now.

Years of rock bottom interest rates have squeezed savers' returns. But from April 6, a new personal savings allowance will be introduced, allowing people to ring-fence more of their savings interest from the taxman.

A basic-rate taxpayer will be able to earn up to £1,000 interest on savings income tax-free per year, while a higher-rate taxpayer will be able to earn up to £500.

The Government has said the new allowance will mean most people will no longer pay tax on their savings interest.

Charlotte Nelson, a finance expert at Moneyfacts.co.uk whose records on average bond rates go back to 2008, said: "It's been a winter of discontent for savers - fixed rate bonds have once again plummeted to record lows and there are currently no signs of an end to this downward path.

"Fixed rate bonds are often looked to as the best place to get a decent interest rate, and given that rates were starting to creep upwards last year, this new turn of events is extremely disappointing."

Ms Nelson said that falls in swap rates have had a negative impact for savers on the bond rates on offer.

She said: "A drop in (swap rates) means that it is now cheaper for providers to fund their mortgage book, which in turn has led to a drop in longer-term investment rates as providers have less need for savers' funds."

Ms Nelson also said that while newer players in the market have been offering competitive deals, bigger players have been failing to compete.

She said: "The challengers make up only a small portion of the market, so their positive impact on the market was always going to be fleeting if the main players didn't get on board.

"With a base rate rise now seeming to have been put out to pasture for the time being, savers inevitably feel as though they are caught in a downward spiral of misery.

"However, with April bringing the new personal savings allowance, now is a great time for savers to re-evaluate their savings pot to try and get the best returns they can."

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