The UK’s beleaguered army of dedicated savers breathed something of a sigh of relief in July when the CPI inflation figure was announced at a lower than anticipated rate of 2.6%, the same as for the previous month, and a little lower than its peak of 2.9% as seen in May.
Savers Still Concerned Over Inflation
Despite the lower than expected rise, the announcement has failed to alleviate savers’ concerns that the value of their cash is gradually being eroded as time goes by.
This, together with the poor returns on their cash, means that savers now need to be even savvier in order to make their money work for them.
In times of market volatility, many conservative savers do not view the stock market as not being the safest vehicle in which to invest their cash, especially with the uncertainty surrounding the outcome of the ongoing Brexit negotiations.
A 7 Year Fixed-Rate Bond?
So, what’s options are there for savers?
High-interest current accounts and linked savings products are one way in which savers can match the 2.6% inflation rate.
However, a better way for those looking to save may perhaps be to open a fixed rate bond or fixed high-interest savings account and lock away their money for a set term length.
Of course, if interest rates go up in this time you may lose out. Having said that, low rates look to be the new normal in the current climate – and raising interest rates can increase mortgage defaults.
One bank is now offering a 7 year fixed rate bond, an unusual product, with most products being 1-5 years in length. Generally, the longer the term the higher the rate as you’ll be incurring greater risk.
Even so, many have sat on a higher rate as they took out a bond at a time when interest rates were higher.
Although seven years might feel like a long time, with interest rates likely to stay at all-time lows for the foreseeable future, longer-term bonds lock in higher rates, which makes this seem like one of the best options to avoid losing money through variable rate savings accounts.
Challenger bank PCF is currently offering a seven-year bond that pays the magic 2.6% figure and, despite being one of the new kids on the block in banking circles, seems to have forged a good reputation so far.
One thing that savers must be mindful of when placing funds into any form of fixed-term product is that there will be hefty penalties applied in the event that they are forced to draw down any cash before the end of the agreed term.
Although your initial rate is a good one, it is important to take into account just how much it would cost you to remove some or all of your money, as a withdrawal in a few years’ time could wipe out all of the interest you’ve earned.