Published: 19/05/2009

It's a pleasant change to be able to report some good news for savers this week.

Since last autumn interest rates have been on the slide and many people now have accounts that are paying extremely poor rates and producing returns that are almost non-existent. In fact in a lot of cases it could be argued that such accounts hardly deserve the label 'savings' any more.

In the last couple of weeks here at Moneynet we've noticed that some of the banks and building societies have woken from their slumber and started to increase the interest rates they are offering on their fixed rate bonds.

At the end of February it was virtually impossible to find a fixed rate bond paying 4%, however now things have changed dramatically and there are over 40 accounts to choose from that pay 4% or more.

So what is a fixed rate bond? - Well the word bond can be a bit confusing and some people assume that it is associated with investments in stocks and shares, but I can assure you that's not the case.

A fixed rate bond is basically a cash savings account where you receive a fixed rate of interest for the term of your investment. You will find that most bonds are for a term of between 1 and 5 years although there are also a few for 6 or 9 months if you look hard enough.

Some of the best deals around at the moment are:

ICICI Bank UK is paying 4% fixed for a 12 months term with a minimum deposit of £1,000 required.

If you're looking for something slightly longer term then West Bromwich Building Society offer a 16 month bond fixed at 4.30% with a minimum deposit of £5,000, whilst a two year deal will get you 4.35% with ICICI Bank UK and also the Nottingham Building Society, both requiring a minimum opening balance of £1,000.

You can find the full range of bonds currently available via the Moneynet banking and savings search.

So what are the downsides of fixed rate bonds?

Firstly you must be sure that you are able to tie your money up for the term of the bond, as in most cases there are no withdrawals permitted until it matures. It's always best to keep some of your savings in an instant access account for emergencies and then put the rest into a bond for a term that suits your circumstances.

Another potential issue is knowing how long to tie your money up for. At the moment there are rates of 4.40% payable if you put your cash away for five years, however with base rate at a record low of just 0.5%, rates are probably only going to go one way (up!) - But the thing we don't know for sure is when and how quickly.

So even if it means getting 0.10% less, it may be better to opt for a one or two year deal at the moment and review the situation at maturity, rather than be locked in at 4.4% when rates may possibly reach say 5% in a year or eighteen months time.

The final thing to bear in mind with fixed rate bonds is that the same guarantee from the Financial Services Compensation Scheme of £50,000 per registered institution applies, so if you've got a larger sum, it may be worth spreading your money between providers if you're looking for absolute peace of mind.

So whilst those are the three minor potential downsides, when you realise that many instant access accounts are paying a miserly 0.1% and the very best barely managing 2%, then it's plain to see why fixed rate bonds are worth some serious consideration.

If you can get double your rate of interest and are confident that you won't need to have access to your money for a year or more, then it certainly makes sense to make your money work harder with a fixed rate bond.

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