Savers holding fixed rate bonds are set to pick up a much reduced income when they come to cash in their investments over the coming months.
More than 5 million fixed rate bonds valued at around £93 billion are due to mature before the end of the year, with most – around 568,450 – ending in November.
Investors will find that their income will drop be around a half as rates they locked in to up to five years ago have withered to around 2.47%.
If the investor pays higher rate income tax in the UK on that return, the net rate drops to a marginal 1.48%.
Just over half the bonds have already matured, and investors have seen their incomes collapse by £1 billion due to lower rates of return.
Poor savings rates
Bruno Genovese, head of savings at HSBC, said: “The Bank of England has already indicated that interest rates are unlikely to rise in the foreseeable future, which means waiting to reinvest at a higher rate is pointless.
“Meanwhile government economic stimulus measures are pushing savings rates down.”
One knock-on effect of the Bank of England pumping money into the economy is banks do not have to rely on savers to provide funds for lending – cheap money is already available and banks have no incentive to offer savers higher returns.
Savers like guaranteed and fixed rate bonds because they give them certainty,” said Genovese.
“But they won’t find any deals that compare with those they locked into in the past and their income will fall away significantly. The solution for many may not mean reinvestment in a similar bond today but to look elsewhere for income.”
Genovese also suggested diversifying portfolios might cancel out falling interest rates reducing income.
Biggest losers
All fixed rate bonds and similar products offered by banks and funds have suffered from a drop in rates.
The least affected are short-term investments of six months, with a 12% decrease.
Investments between 12 months and 18 months have suffered an average 38% income fall, while longer term fixed rates between 24 months and 60 months average a 50% decrease.
The biggest losers are 36 month fixed rate investors, according to HSBC.
“These investors will experience the largest fall in income. Investors currently have an average investment of £22,333 in these bonds,” said Genovese. “Reinvesting this straight back into a best buy product would give an income of £3,037 a year – down £1,576 a year on their current return.”
