New fixed rate bond paying 3.65% from Coventry Building Society

The new one-year bond from Coventry is not only a table topper, but it also beats inflation!

Savers have had a tough time finding a decent home for their money in recent years. The record low base rate, income tax rises and persistently high inflation has made trying to make savings grow and retain their value, extremely difficult.

As a rule of thumb, savers can get access to the best returns if they are willing to lock up their money for a period of months or years rather than depositing cash into an account that allows easy access.

Bond with Coventry

Coventry Building Society has launched a market-leading new bond that is worth a look.

The bond pays an impressive 3.65% on your savings, providing you are happy to relinquish access to your cash for over a year.

The bond is fixed until the 31st of December 2013 so if you choose to put your money here you won’t be permitted to make any withdrawals nor will you be able to close the account until the anniversary.

That's not great if you want to keep the cash close to hand, in case of an emergency, but the restricted access provides a better rate than other accounts that are more flexible.

To illustrate, the top rate of an easy access account at the moment is 3.25% and the best notice account is offering 3.36%, so it’s clear to see you could be getting a better return if you can resist and leave your money alone for a while. Check out Easy access vs notice savings accounts for more.

But why does chasing the best return matter?

Why chase the best rate?

Inflation refers to the rising cost of living. As life becomes more expensive, the value of your money is eroded. Savers should always aim to beat inflation, so that their money can retain its purchasing power as time passes and the cost of goods and services rises.

So if you had a tidy sum of £10,000 in 2010 stashed under your bed, it would only have the spending power of around £9,480 in 2011 as inflation was 5.2% during this period.

Even if that money was kept in the bank, it would need to be enjoying a rate of at least 5.2% after tax in order to generate an actual return.

Beating inflation 

It sounds like a lot to battle wit,h but there was some good news for savers a few weeks ago when the Office for National Statistics announced that the Consumer Prices Index (a measurement of inflation) had dropped from 3.0% in April to 2.8% in May.

According to Moneyfacts a basic rate taxpayer now needs to find a savings account paying 3.50%, while a higher rate taxpayer needs to find an account paying at least 4.70% to keep their savings on the right track. Luckily there are currently 166 savings accounts around that can help.

Inflation beating one-year fixed rate bonds

Below is a table which shows the best inflation beating one-year fixed rate bonds.

Fixed rate ISAs

Of course tax as well as inflation will eat into your returns, so all savers should be looking to take advantage of their ISA allowance (currently £5,640). Variable ISAs are good for access, but the rates on offer at the moment aren’t too hot - the best I could find was from Santander for a rate of 3.30%. A fixed rate ISA account with limited access over a longer period will get you better returns.

Source: Moneyfacts

The fixing problem

The problem with fixing for this length of time through a bond or an ISA is that if interest rates rise and banks become more generous with new accounts, your savings won’t be able to benefit because they are locked in.

The target

Inflation has dropped by 1.7% over the year, so hopefully the fortunes of savers will improve as inflation creeps closer to the Bank of England’s target of 2.0%.

Whatever account you go for make sure you have considered what sort of access you are likely to need and how best to protect your money from inflation.

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