Fixed rate bonds pay a set amount of interest, over a predefined period on money you can afford not to access.
Because the bank or building society knows it will have the use of your money for the duration of the bond’s term, it can pay you a higher rate of interest than on an easy access account where it can’t be certain of having your money from one day to the next. The longer you are prepared to not have access to your money for, the higher the rates of interest that will be on offer.
Fixed rate bond terms can range from less than a year, right up to five years (or even longer in a few cases), giving savers choice on how long they wish to commit their cash. We say ‘commit’ because a fixed rate bond may not allow you to access your money during the term – and if access is allowed, it’s normally at the expense of a big interest penalty. Generally speaking the best one year fixed rate bonds won’t allow you to make a withdrawal if you need to. However, longer-term bonds may allow access, but will impose strict interest penalties.
Early access penalties
Bonds that do allow access may impose a flat loss of interest penalty, no matter when in the term you make the withdrawal (so, 180 days’ loss of interest for instance). Others may taper the penalty, depending on the point during the term the withdrawal is made (so, 365 days’ loss if the withdrawal is in the first year, 320 days’ loss if the withdrawal is in the second year, etc.).
Depositing into a fixed rate bond
Fixed rate bonds may only allow you to make a single deposit at account opening. If you are allowed to make further deposits after opening, you will only be able to do this while the bond is on offer to new customers – once it is withdrawn from sale you cannot add to your savings pot.
So if you’re looking for a savings account that will allow you to add to your savings, a fixed rate bond is not for you. You could try the alternatives of a regular savings account, or a variable rate easy access or notice savings account instead.
How your interest is paid
Most fixed rate bonds will pay interest every year, allowing you to benefit from the positive effects of compound interest over a longer term. However, some bonds may pay interest only when the term ends and the bond matures. Providers may also offer a monthly interest option, which allows savers who use their interest as income to get a regular, set monthly payment from their savings.
When your fixed rate bond matures
Be sure to keep track of when your bond ends. Your bank or building society will normally write to you as the bond approaches the end of its term to ask what you want to do. If it doesn’t hear anything, your money may be re-invested in another fixed rate bond, or a variable rate maturity savings account, which may not pay as competitive an interest rate.
What are the advantages of fixed rate bonds?
As mentioned above, fixed rate bonds usually pay higher interest rates than easy access savings accounts.
If you have some cash that you do not need access to for say two or three years, you can boost your returns by opting for a fixed rate account. This is particularly true should interest rates fall during the term.
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But beware: you may find yourself locked into an uncompetitive rate should rates start to rise while your money is locked away in a fixed rate bond.
This is why shorter-term fixed rate bonds tend to be more popular, despite those lasting longer offering superior rates of return.
Either way, the simplicity of these products makes them a straightforward way to save – particularly if you can afford to keep some rainy day savings in an easy access account.
If you lack discipline, fixed rate bonds are also a good way of ensuring that you leave your nest egg untouched for a certain length of time.
And as long as the bank or building society offering the fixed rate bond is authorised by the Financial Services Authority, the Financial Services Compensation Scheme will cover deposits of up to £85,000 (as of 30 January, 2017). This amount applies per individual per institution, not per account, so watch out if you have two accounts with a single bank that have a combined balance above £85,000, as not all of your money will be protected. If you have a joint account, both accountholders have £85,000 of protection, giving a total of £170,000.