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Savers and pensioners cheer as bonds surge past 4pc

A pie chart with an arrow and money
A pie chart with an arrow and money

Savers and pensioners are celebrating an unexpected boost to their wealth after the era of rock-bottom interest rates comes to an end.

One-year bonds are now paying more than 4pc while annuities – which pay a guaranteed income for life – are yielding 7pc. That means a £100,000 pension could buy £7,000 a year for life. A year ago annuities paid barely half that figure.

The sudden increase in market rates means that savers have earned more from cash accounts than the stock market for the first time since 2015.

A saver who deposited £5,000 in a one-year fixed bond in January secured an average rate of 0.8pc, according to Moneyfacts, an analyst. So far they would have effectively earned 0.5pc on their cash.

While the return on cash savings has been low, the global stock market has fared worse this year. The MSCI World index, which tracks the largest companies in the world, has lost 8pc this year.

The last time savings beat stocks was in 2015, when volatility in China, Brexit uncertainty and the default of Greek debt spooked investors across the globe. At that time a saver who had fixed in a one-year bond would have secured a rate of 1.42pc. Global stocks lost 1pc in the same period.

The gap between savings and investments could widen further this year, as interest rates rise and stock market volatility continues, experts said.

Russ Mould, of the broker AJ Bell, warned that inflation, war and rising interest rates were working against stock investors.

“Investors are now trying to work out when and why the mood music can change again,” he said. “Hopes for an early reversal of interest rate cuts drove the rally in share and bond prices over the summer, but sharp rates rises from central banks in the USA, European Union, Scandinavia, Australasia and Asia – with Japan, Russia, Turkey and China the only outliers – have punctured those hopes.”

He added: “That leaves markets facing the possibility of a recession on their own. Without the backstop of the central bank support and liquidity to which they have become accustomed, even addicted to since the late 1990s.”

Meanwhile, saving accounts are slowly improving: the average rate for a one-year fixed bond has increased to 2.33pc, according to Moneyfacts. The average rate for a £10,000 deposit in an easy-access account is 0.85pc, and 0.92pc in a cash Isa.

These figures could rise much further, as the Bank of England continues to increase interest rates. Market pundits now expect the Bank Rate to reach as high as 5.75pc next year, which would in turn buoy saving deals.

The top paying one-year fixed bond is from Atom Bank at 4.11pc, according to analyst Savings Champion. The best-paying easy-access account is from Al Rayan, which offers a rate of 2.35pc.

The highest paying cash Isa is from Paragon Bank at 1.9pc.

There is no savings account that beats inflation, which hit 9.9pc in August. However, experts have cautioned that investing remains the best way for savers to grow their money over the longer term.

James Yardley, of the broker Chelsea Financial Services, explained: “The good news with market falls is that it sets us up for higher returns in the future. You can still expect good returns from investing in the stock market for the long term and prices are now from a much better starting point.

“It is also possible that inflation falls in the future and that the status quo reasserts itself in the medium term in which case all assets can do well.”