Earn 4% Cash for 10 Years

After months of cash accounts that barely match the rate of inflation, Leeds Building Society is paying 4% on deposits - but you have to lock it away for a decade

Emma Wall 20 November, 2013 | 2:59PM
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Good news for savers - finally a cash account that pays a healthy rate of interest. The only catch? You have to lock your money away for a decade. 

Since the Bank of England lowered base rate to 0.5% nearly five years ago savings rates have plummeted. Before the global recession it was not uncommon to find savings accounts paying double the rate of inflation - now you are lucky to find a cash bond or ISA that matches it. 

Leeds Building Society cash bond paying 4% is welcome respite from this interest desert, but savers could be forgiven for feeling duped at the 10-year term - especially if interest rates rise before maturity.

Nick Hayes, manager of the AXA WF Global Strategic Bonds fund said last week: "With future unemployment levels falling faster than expected and higher expected GDP, “traditionalists” would be led to believe interest rates could be expected sooner rather than later."

Azad Zangana, European economist at Schroders, said that the Bank of England now forecasts the unemployment rate to hit the Bank’s 7% threshold in the second half of 2015, compared to previous guidance which assumed the threshold not being met before the middle of 2016.

"The latest figures on the unemployment rate show a fall to 7.6% in the three months to September," he said. "The change in guidance suggests the Bank of England thinks it will begin to consider raising interest rates over a year earlier than it thought only three months ago."

Some commentators have called into question the influence Bank base rate has over cash savings accounts. While there is no disputing both saving and borrowing rates fell as the Bank reduced base rate, but this has held steady at 0.5% for 105 months and savings rates have continued to fall.

This, in part, is thanks to the Funding for Lending scheme rolled out by the Government in August 2012. The Funding for Lending Scheme (FLS) offered banks and building societies access to cheap finance in the hope this cash would be passed on to the public in the form of mortgages but analysts say that it has also made lenders less reliant on attracting customer deposits. As lenders have been able to tap the Bank of England for cheap money, they no longer have to attract savers to deposit cash by offering competitive rates.

The initial scheme has been extended twice, and with these extensions, so savings rates have fallen further. Two years ago the best easy access cash savings account was paying 3.15% - now the best paying account is from BM Savings Online and yields a paltry 1.7%. Similarly the best cash ISA paid 3.05% in November 2011, now the Post Office Premier Cash ISA pays 1.8%.

There has been some good news for savers over the past two years however – as inflation has fallen.

"Inflation is the savers’ silent assassin, but strangely although interest rates were much higher two years ago, inflation was more than double what it is today," said Anna Bowes of SavingsChampion.co.uk. "So in real terms savers are now actually better off, although you’d be forgiven for not feeling it."

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Emma Wall  is former Senior International Editor for Morningstar