Get 2% on your savings – warning this fixed-rate bond could be riskier than you think

Investment platform AJ Bell has just launched a new five-year fixed rate bond on its Youinvest platform. It pays 2 percent a year on a minimum deposit of £1,000, a rate that is only matched by one other provider, Recognise Bank. JN Bank is close behind paying 1.95 percent. Yet there is also a downside.

Savings rates are already starting to rise in anticipation of a base rate increase by the Bank of England.

Just a few months ago, savers considered themselves lucky to get 1.5 percent in return for locking their capital away for five years.

However, AJ Bell’s 2 percent return is still below the consumer price inflation rate of 3.2 percent in the year to August, which means that the value of your money will fall in real terms.

There is another catch – inflation is set to get a lot higher.

The Bank of England has warned inflation could hit 4 percent this year, but it could easily top 5 or 6 percent amid food shortages and soaring energy prices.

That makes locking into an interest rate of 2 percent for five years risky. Within a few months, it could start to look like a derisory return.

If the Bank of England increases interest rates, better rates could flood onto the market, said Andrew Hagger, personal finance expert at MoneyComms.

“If that happens, today’s long-term fixed rates may become uncompetitive after a few months.”

READ MORE: Get 1% cashback and 5% on your savings! There is a catch, though

Hagger suggested fixing for a shorter period. “Gatehouse Bank pays 1.60 percent fixed for 18 months. If you want an even shorter term, Zopa pays 1.36 percent fixed for one year, and Aldermore pays 1.35 percent.”

That way you can move on sooner if rates do rise.

However, Sarah Coles, personal finance analyst at Hargreaves Lansdown, said second-guessing interest rate movements also has risks. “We cannot be sure when base rate rise will rise, or whether the banks will increase savings rates if it does.”

Rather than waiting for better times, Coles suggested shopping around to improve your returns today. “If you are getting 0.01 percent from your high street bank, you can get more than 60 times that return on easy access today.”

The Family Building Society pays today’s leading easy access rate of 0.65 percent, followed by Aldermore, Leeds Building Society and Marcus by Goldman Sachs at 0.60 percent.

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AJ Bell’s cash savings hub lets savers manage their cash in one place, and open as many accounts as they like from a range of banks, a concept similar to Hargreaves Lansdown Active Savings and Raisin UK.

Laura Suter, head of personal finance at AJ Bell, said millions have saved money during lockdown only to leave it sitting in a bank account earning next to nothing. “It only takes a few minutes to switch it to a better paying account. The recent savings rates war means you could now get much better rates.”

A saver with £5,000 would get just 50p interest a year if they left it in their current account earning 0.01 percent, but moving it to a best buy 2 percent rate would give them £100, Suter added.