Savers don't need to sacrifice flexibility

A new bond offers a decent rate without penalising consumers who need their cash early. Chiara Cavaglieri reports

Savers are usually forced to plump for one of two options: either lock money away for the best rates, or sacrifice the return in favour of flexibility. It can be a tricky decision, but a new product launched by Barclays could bridge the gap.

The new two-year flexible bond is the first of its kind and offers a competitive rate of up to 3.50 per cent AER, but with the option to withdraw up to 30 per cent of the balance without incurring any charges. This isn't for everyone to enjoy, however, as you need a minimum balance of £50,000 to get the full 3.50 per cent return. Otherwise the rate drops to 3.20 per cent.

"Previously, customers have had to choose between the higher rates of fixed-rate bonds or the flexibility of instant access accounts," says Andy Gray, the head of savings at Barclays. "The Barclays Flexible Bond will give savers the best of both worlds: a competitive fixed rate and the flexibility of having access to a good proportion of their savings when they need it."

Three withdrawals of up to 10 per cent (maximum 30 per cent) of the initial deposit are permitted without charges or the need to give notice. If you invested £10,000 you could withdraw a total of £3,000 over the two years without penalty. The idea behind the Barclays bond is interesting – you earn a decent rate but with the peace of mind in knowing that you can get your hands on your cash instantly in an emergency, or perhaps reserve a set amount for future plans.

In contrast, with most bonds your money is locked up for the entire term; although some accounts do allow access, it means you either lose a chunk of interest or you have to close the account early. Regular saving accounts are typically just as restrictive; many offer similarly impressive rates, such as First Direct offering a return of 8 per cent for one year, but with this you must have a First Direct current account, you can deposit a maximum of £200 per month and you can't make any withdrawals or miss any monthly deposits during the year.

With so many penalties and constraints to worry about, there is certainly a gap in the market for more flexible fixed-rate accounts such as the Barclays bond. The bank says its bond is the first of its kind and it's a great line, but there are rival products in place already.

"The concept of allowing access to a fixed-rate bond, subject to a slightly reduced rate when compared with the market isn't anything new," says Michelle Slade from Moneyfacts.co.uk. She highlights other two-year bonds such as the Leeds Building Society Fixed Rate Bond Issue 82, which pays up to 3.00 per cent, and the Newcastle BS Fixed Rate Options Bond Issue 55, which pays 3.50 per cent. Both accounts allow for up to 25 per cent of the original capital to be withdrawn penalty free.

For bonds of the same term without any penalty-free access, the market leader from Secure Trust Bank pays 4.01 per cent. If you want penalty-free access at all times and with no restrictions, an easy-access account is the way to go but the best-buy rate falls to 3.05 per cent with the Online Access account from Leeds, while Nationwide pays 3.01 per cent on its MySave Online Plus account.

While these flexible bonds do offer some middle ground, a better option could be NS&I's inflation-busting bonds which pay a fixed interest rate plus RPI (currently 5.2 per cent). These "five-year" certificates are something of a cross between an easy access savings account and a one-year bond.

As long as you cash them in after one year you benefit from full index-linking to date, plus the underlying fixed rate which starts at 0.25 per cent and rises to 0.86 per cent in year five. Even better, all returns are tax free.

You could also opt for a notice account whereby you must give the bank a specific number of days' warning before a withdrawal. This could push up the rate back to as high as 3.31 per cent with the Manchester 45 Day Notice Account. You will also benefit from base rate rises as they happen.

"While fixed rates give you certainty of return you will generally only know with hindsight whether or not they were the best option," says David Black, banking expert at Defaqto. "This is because no one knows when, by how much and how frequently the bank base rate will increase in the future. A fixed rate that looks attractive now may not do so in two or three years' time."

The problem, however, is that you still need to be careful that you aren't opting for a less flexible account for the sake of a small uplift in rate, or sometimes no increase at all. If you're not comparing best buys across the board you could end up with a notice account that can be beaten by an easy or instant access account. Equally, there are easy access accounts that blur the lines and restrict or penalise withdrawals, so you need to do your homework to ensure you're not sacrificing a better rate without gaining the associated flexibility.

The message is to be proactive and review your existing deals – some pay as little as 0.01 per cent – and if necessary play accounts off each other to create your own flexible portfolio.

"Those contemplating variable rate savings accounts should scan the best-buy tables, and take advantage of things like introductory bonuses and guaranteed minimum rates while remembering to review their arrangements when the introductory bonus or rate period ends. Some people may prefer to split their funds putting some into the highest paying easy access account and some into a fixed rate bond," says Mr Black.

Expert View

Michelle Slade

"It has always been the case that the trade-off for access is lower rates. If savers are worried about maintaining access, they should ensure they keep at least part of their money in an easy-access account. That way, if an emergency does arrive, they get their funds straight away without penalty."