The introduction by National Savings & Investments (NS&I) of table-topping rates on its one, two, three and five-year savings accounts has shaken up the fixed-rate bond market.

Since October 26, when the Government-backed bank announced that it will offer customers 3.95 per cent on its one-year Guaranteed Growth Bond, 54 fixed-rate bond products have been launched or reissued, including eight reissued with higher rates, according to Moneyfacts.co.uk.

Michelle Slade, an analyst at Moneyfacts, says: “At the end of last month we saw an increase in the number of products having their rates cut — the average rate of a one-year bond fell from 3.23 per cent at the beginning of October 2009 to 3.18 per cent by the end of the month. A number of best-buy bonds were withdrawn. But in the past ten days there has been a sudden resurgence in the number of banks launching products or maintaining competitive rates, spurred on by NS&I,” she says.

Andrew Hagger, of Moneynet.co.uk, described NS&I’s new rates as “a kick in the teeth” for competitors but “great for customers”. On November 2, for example, Wesleyan Bank raised the rates on its one, two and three-year bonds by 1.25 per cent, 1.75 per cent and 2.25 per cent respectively to 3.5 per cent, 4 per cent and 4.5 per cent. Lloyds TSB and Halifax also increased rates.

NS&I has the top one-year bond, with a rate of 3.95 per cent. All NS&I accounts have the added bonus of being 100 per cent backed by the Government, so savers can deposit more than the £50,000 Financial Services Compensation Scheme guaranteed limit and have peace of mind.

The AA has the top two-year bond at a rate of 4.35 per cent on a minimum deposit of £500, followed by Coventry Building Society’s Poppy Bond, which has a good rate of 4.3 per cent and also promises to donate 0.2 per cent of all deposits to the Royal British Legion. ICICI Bank UK has the best rate on a three-year bond — 4.7 per cent on minimum deposits of £1,000.

The top rates are, however, still available only to customers prepared to lock their money away for five years. Skipton Building Society’s new five-year fixed rate bond is top of the best-buy tables at 5.35 per cent, followed by Yorkshire Building Society’s reissued five-year bond at 5.3 per cent. The Skipton account can be opened with a minimum deposit of £500, while Yorkshire asks for £100. Barclays’ Five Year Fixed Rate Savings Bond Issue 46 has a rate of 5.25 per cent on a minimum deposit of £500.

However, David Black, of the data analysis company Defaqto, says: “Watch out for accounts that put restrictions on withdrawals. Some will impose penalties if you make more than a specified number of withdrawals. Penalties vary: your rate may be reduced, you may incur loss of interest for that calendar month, or your funds may be transferred to a much lower-paying account.

“Invest in a fixed rate only if you are confident that you won’t need the funds during the term of your account. It may be worth splitting your savings by putting some of them in a fixed-rate bond and some in a best-buy easy access account.”

Whether savers should fix for such a long period is still unclear, given the uncertain future of the Bank of England base rate. Ms Slade says: “Recent Moneyfacts research shows that despite the best rates being offered on longer-term bonds, two thirds of savers are looking for no more than a three-year commitment.

“No one can give a definitive answer to when the bank rate is likely to rise and how quickly, so most savers are prepared to tie in for only a couple of years. They are concerned that, if they opt for a longer-term bond, they will be tied to what becomes an uncompetitive rate when the bank rate rises.”

A recent report by the Centre for Economics and Business Research says the base rate is likely to remain at 0.5 per cent until at least 2011, and will stay below 2 per cent until 2014. The Confederation of British Industry, on the other hand, predicted in September that the UK bank rate will start rising next spring, reaching 2 per cent by the end of the year.

Unkindest cuts for flexible accounts

Savers who don’t want to lock away their money will be disappointed to hear that 31 variable-rate savings accounts have cut rates in the past month, according to Moneyfacts.

These include accounts with Bank of Scotland, Clydesdale Bank, Intelligent Finance and several building societies. The cuts leave 48.8 per cent of variable-rate accounts on the market paying bank rate or less, with 22.8 per cent offering a measly 0.1 per cent or less.

Of the higher-paying flexible accounts, David Black, of Defaqto, recommends West Bromwich Building Society’s Branch Bonus Account 2, paying 3.38 per cent on minimum balances of £100, which includes a 0.6 per cent introductory bonus. It permits two withdrawals a year, so he suggests that savers close it when making the second.

Mr Black also cites ING Direct’s Savings Account, paying 3.2 per cent. The rate is guaranteed for 12 months, after which it will revert to ING’s variable rate.