Do you want to improve your savings? A two-year contract is my tip, says SYLVIA MORRIS

One-year fixed-rate bonds have been a big favorite among savers for months.

But a new sweet spot has emerged, and short-sighted savers could miss out on higher returns if they stick with the ever-popular one-year base product.

Two-year fixed bonds are the new star of the show as inflation falls and interest rates are set to fall towards the end of the year.

Join now and you’re almost guaranteed to beat any one-year deal you can get this time next year, according to the latest forecasts.

Fixed-term bond yields have gone up and down in the past week, but savers can still fixate on more than 5 percent for two years.

RCI Bank has raised its two-year interest rate to 5.05 percent, which matches the interest paid by Close Brothers Savings.

Several of these, including Atom, Beehive, Hodge Bank, Union Bank of India and SmartSave, remain just below the line with a score between 4.96 and 4.9 percent.

If you choose the best one-year bond, you can earn a little more: 5.18 percent through SmartSave.

But to beat the 5.05 percent for two years, you have to lock in at 5 percent when you come to renew your one-year bond in a year.

And since interest rates are expected to drop over the course of the year, it’s doubtful you’ll find this high interest rate.

So far, savers have been understandably reluctant to tie up money for more than a year.

The cost of living crisis has meant that we prefer to have our money close at hand, in easily accessible accounts or in shorter-term bonds, such as six months to a year.

But fortunately, the times of frighteningly high inflation appear to be behind us. Annual consumer price increases fell from a recent high of 11.1 percent in October 2022 to 3.2 percent in March.

The Bank of England has been forced to raise interest rates in an attempt to control inflation. The base interest rate, which is now 5.25 percent, is at the highest level in sixteen years and has remained there since last August.

The theory is that if you make borrowing more expensive, people will have less money to spend. This in turn reduces demand for goods and slows price increases.

When inflation falls, the opposite happens and interest rates tend to fall. As inflation slowly moves towards the Bank’s 2 percent target, money markets are predicting two interest rate cuts this year, the first of which will take place in the autumn and will see the base rate fall by 4.75 percent.

The savings interest will follow. The highest interest rates on two-year bonds I mentioned above are only offered to those willing to buy online.

The best High Street rate is much lower: 4.4 percent compared to Principality or 4.35 percent compared to Leeds BS and TSB.

Keep in mind that with a fixed-rate bond, you typically won’t be able to cash it out early, even if you need the money.

If you choose a fixed term Isa you can usually do that and all your interest will be tax free. ISA rules require providers to give you access to your money during the term, although you will have to pay a fee – usually the equivalent of six months’ interest.

But rates tend to be lower because there is less competition and fewer banks offering cash Isas. The best two-year rates are offered by Oaknorth (4.62 percent), Shawbrook (4.61 percent) and Secure Trust (4.6 percent).

NS&I’s early warning about the rates will be reduced

National Savings & Investments has reduced the amount of warning savers receive before cutting interest rates from two months to just two weeks.

The change, which comes into effect from July 1, applies to rate changes on the Direct Saver, Direct Isa, Junior Isa, Investment Account and Income Bonds.

This step brings NS&I in line with the guidelines for banks and building societies.

These rules from the local authority regulator, the Financial Conduct Authority (FCA), require providers to notify you of the change within a period starting 14 days before the discount is introduced.

Providers can warn earlier, but must send a reminder within those fourteen days.

NS&I is not bound by the FCA rules, but by the government. However, HM Treasury expects it will comply with FCA requirements and reflect the standards in the rulebook. The change does not apply to Premium Bonds.

The last time the prize money was reduced from 4.65 percent to 4.4 percent during the March draw, NS&I announced the change on January 11.

The Premium Bonds customer agreement states: ‘The prize fund percentage, prize values, odds of winning and the way we allocate prizes of each value may change from time to time. Then take a look at our website.’