It’s getting harder to pick a bond

CHOOSING a fixed-rate bond is becoming increasingly complicated.

You might think you have found the best rate — but fail to dig down into the terms and conditions and you could lose out.

Take how the interest is paid. Many bonds reinvest your interest at the end of each year, which is advantageous as you earn more over the term, thanks to the compounding effect. But some banks will not let you do this.

Metro Bank’s 18-month bond, paying a top 2.05 pc, automatically pays the annual interest into a separate current account or easy-access account. So your first interest payment after 12 months — £205 on each £10,000 — cannot be added to your bond to earn 2.05 pc over the next six months. It ends up in an account paying less or nothing.

Others go to the other extreme and will not let you touch any of your interest until you have sat out the full term. National Savings & Investments (NS&I), for example, changed the terms and conditions on Guaranteed Growth Bonds sold from May 1 and no longer allows you access to your capital or interest until the end of the term.

Over a three-year deal, the move could alter your tax position. This is because all your interest — £596 on a maximum investment of £10,000 at 1.95 pc over three years — will count as income in the year your bond matures, rather than being spread over three annual payments of roughly £200 each.

Some savers could bust their £1,000 personal savings allowance (£500 for higher earners) in the year their bond matures and have to pay tax on the interest.

Before you invest, check whether you are allowed access to your capital during the term. Most will not let you touch the money for the duration, or will charge a fee, often equal to three months’ interest, to do so. If you might need to get hold of your money quickly, then, you may want to steer clear. Alternatively, the new Flexible Bond from Barclays lets savers take out nearly a third of their money during the two-year term through three withdrawals, each of up to 10 pc of your initial deposit.

At 1.2 pc, it pays less than top two-year rates, such as 2.1 pc from Charter Savings Bank and Kent Reliance. But the easy-access rates paid by big banks can be as low as 0.15 pc.

Yorkshire BS will let you access your cash if your circumstances change — for example, if you suffer a terminal illness, are made redundant, or need the money for nursing home or care costs.

Watch out for what happens when your bond expires, as some providers dump your cash into a poor-paying easy-access account. Others, including NatWest, Ford Money, Skipton, Yorkshire BS and NS&I, reinvest it for another term, unless you tell them not to.

Once in a new bond, you don’t have long to get your money back without charge. NS&I, NatWest and Yorkshire BS allow around four weeks, Skipton 21 days, and Ford Money only 14 days.