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Fixed rate bonds

Written by Sebastian Anthony

Fixed rate bonds are also known as ‘fixed rate savings accounts’. They're savings accounts in which you can deposit a lump sum for a set period of time, usually between 1 and 5 years.

Interest rates on fixed rate bonds are often higher than more flexible, easy access savings accounts. You're essentially being paid (interest) to lock your money away.

Many fixed rate bond providers do not allow cash withdrawals before the fixed term ends. Some do, but will charge you for the privilege, either in the form of fees or as a reduction in your interest rate.

You can apply for most fixed rate bonds online, over the phone or by post. Check with each provider before you apply.

Is a fixed rate bond right for me?

A fixed rate bond may be the right option for you if:

  • You have a lump sum of cash you do not need access to for a fixed period of time

  • You like to know exactly how much interest you'll earn and when it will be paid to you

A fixed rate bond may not be the right option for you if:

  • You think you may need to get to your funds within the fixed timeframe

  • The fee or the loss of interest you'll incur from early withdrawal wipes out any return on the initial investment. In that instance, a different savings account may be more suitable

  • It looks like interest rates will increase before your time is up

Thanks to the very low Bank of England (BoE) base rate, all interest rates remain very low in the UK today. But if the BoE increases the base rate, all other interest rates will also rise.

If rates go up while your money is locked away in a 5 year bond, you would not be able to take advantage of the better rates.

Things to consider for fixed rate bonds

There is more to consider with a fixed rate bond than the time your money is locked away for. These include:

  1. Deposit amounts

  2. Deadlines for deposits

  3. How often the interest is paid

  4. How much money is protected

  5. Tax

There's almost always a minimum and/or maximum deposit amount

You'll not get the high interest rate unless you deposit the minimum amount.

There may also be a maximum balance limit. This could be as high as £1 million, so the balance limit may not be an issue for you!

You'll often have to make the first deposit within a few days of opening the account

Some accounts do offer a small window of time where you can make several deposits but these will also have a final deposit deadline. After that, the account will be closed for deposits and your interest calculated on the balance in the account at that time.

To receive the interest you expect, deposit the money you're planning to invest in good time.

If the deposit time has ended and you have another lump sum to deposit, you'd need to open a second account. You may be able to open it with the same provider, but it cannot exceed their maximum balance limit.

You may be able to choose how often the interest is paid

Depending on how long the fixed rate lasts for, you could end up earning interest on your interest. This is known as compound interest.

If you opt for monthly rather than annual payments, there may be a slight reduction in the interest rate. This is because you'd be earning more compound interest, and the bank or building society needs to balance the scales.

How much of your money is protected?

The FSCS is the Financial Services Compensation Service. It protects funds up to £85,000 in accounts (or £170,000 in joint accounts) per banking group. What this means is, if your provider falls into bankruptcy, the FSCS will reimburse you up to £85,000.

If you have more than this amount to invest in a fixed rate bond, spread your money across a few accounts. Each account needs to be with a different banking group because the maximum reimbursement per group is £85,000. Always check to ensure your savings accounts are not all with the same group.

Not all suppliers have FSCS protection. Some use alternative schemes backed by other European Governments, like the French Fonds de Garantie des Dépôts et de Résolution. Your level of protection will fluctuate on a daily basis, in line with foreign exchange rates.

Other suppliers offer their own protection scheme...or no protection whatsoever. This means you could lose all your savings should the provider go bust.

Unfortunately, suppliers with no protection often offer some of the best interest rates. This makes them very tempting and highlights the importance of looking beyond rates when you're shopping around.

Your tax bracket influences how much you can save tax-free

Basic rate taxpayers (20%) can earn £1,000 interest without paying tax. High rate taxpayers (40%) can earn £500 interest tax-free. All savings account interest is paid gross.

If the interest you earn exceeds those thresholds, you'll need to declare it on your tax return.

Extra info on fixed rate bonds

There's no limit to the number of fixed rate bonds you can hold

For those with savings above £85,000, be sure to spread your money across different banking groups. That way you're eligible for the most amount of protection from the FSCS.

It may not be worth withdrawing your money before your bond matures

Some providers do allow for early access to your money in a fixed rate bond. But there's often a penalty for this. Early access penalties tend to mean forfeiting at least one year’s interest.

If you want to withdraw your money within the first year of the bond, the penalty charge could be deducted from the original investment.

Before investing in a fixed rate bond, be sure you will not need the money before it matures.

You can get a joint fixed rate bond

A number of suppliers offer bonds that can be held in joint names, though this is often capped at two people.

The FSCS protection stretches to £170,000 per banking group on joint fixed rate bonds.

Your estate may not be able to withdraw your funds if you die before it matures

Access to deposits in a fixed rate bond varies from supplier to supplier.

Some allow the account to be closed early, and release the money to your estate. Others may insist that your money is only released to your executor when the bond matures.

For joint fixed rate bonds, the bond will continue until maturity in the name of the surviving bondholder.

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