Fixed rate bonds (also known as ‘fixed rate savings accounts’) are accounts which let you deposit a lump sum for a fixed period of time – typically between one and five years – and earn a comparatively higher rate of fixed interest than more flexible savings accounts. Many fixed rate bond providers do not allow any early withdrawals of funds – or if they do let you withdraw funds, you’ll be hit by big fees or a reduction in your interest rate.
Most fixed rate bonds can be applied for online, and some over the phone or by post. If you have a strict preference for one type of application, check with each provider before you decide to apply. Furthermore, if you are looking to open a joint account, always check before you apply, as some don’t offer this option.
If you have a lump sum to invest for a fixed period of time, without requiring any access to it whatsoever, then a fixed rate bond offers a competitive and fixed rate of interest for your hard-earned savings. With such an account, you can be sure of the amount of interest you will earn and exactly when it will be paid to you. If there is a possibility that you will need to get at your funds within your chosen investment time, it is likely that the fee or the loss of interest incurred will reduce your returns to a point where another savings account may reap more of a benefit.
The longer the fixed-rate term the higher the interest rate – which sounds like a good thing, but it’s still a gamble in a sense. Interest rates are very low in the UK today, but it may not always be that way. If the Bank of England increases the base rate while your money is locked away in a five-year bond, you wouldn’t be able to take advantage of the higher-interest savings products that would surely become available soon after.
*Minimum/maximum deposit amount. *There is almost always a minimum deposit amount when opening a fixed rate savings account, which can range from £500 – £1,000, and a maximum balance limit of around £250,000.
*Deadline for deposits. *There is generally a fixed deadline when your money must be deposited. With most fixed rate bond accounts, once your money has been invested, no more deposits can be made. That said, there are some which offer a small window where several deposits can be made, but there is always a deadline date where the account is closed for deposits and your interest is calculated on the balance in the account at that time. With this in mind, make sure you have access to the money you are planning to invest, and deposit it in good time to ensure that you receive the interest you expect. If you do have another lump sum in the future, a separate account with the same provider can be opened, so long as it doesn’t exceed their maximum balance limits.
When to have the interest paid. The capital on a fixed rate bond can’t be withdrawn until the bond matures (unless you pay a fee or suffer a reduction in the interest rate) – but you can sometimes choose when you are paid the interest. If you choose to be paid monthly as opposed to annually, there will be a slight reduction in the interest rate.
FSCS protection. With any savings account, always check that your chosen provider is authorised with the FSCS (Financial Services Compensation Service). If the worst should happen and your provider falls into bankruptcy, the FSCS will reimburse you any balance up to the amount of £85,000 (or £170,000 for joint accounts) per banking group. If you have more than this amount to invest in a fixed rate bond, it is always prudent to spread your payments over a number of different providers, checking to ensure that they are not part of the same group.
Your tax position. With the introduction of the personal savings allowance in April 2016, which offers basic rate taxpayers the opportunity to earn £1,000 in savings interest per tax year and high rate taxpayers £500, all savings account interest is paid gross. If you are liable for paying tax on savings over and above the allowance, you will need to declare this income on your tax return.
Find out more by reading our fixed rate bond guide.
In most instances, your money will be protected in a rated rate bond by the Financial Services Compensation Scheme up to £85,000.
Some suppliers offer alternative protection through schemes equivalent to the FSCS but backed by other European Governments – such as the French Fonds de Garantie des Dépôts et de Résolution. Where this is the case, you must remember that 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. In these instances, your money has no statutory protection and is at risk if your supplier goes into liquidation. Unfortunately, products offered by suppliers with no protection often offer some of the best interest rates available, and these can be very tempting. If you’re depending on your investment for your future financial well-being, these products should be approached with extreme caution, or avoided altogether.
There is no limit on the number of fixed rate bonds you can hold. If you are investing more than £85,000, though, it would be wise to split your investment amongst different banking groups, to ensure that you receive the maximum possible protection from the FSCS.
In many instances, you will not be able to access any money contained in a fixed rate bond until it has matured. Some providers do allow for early access, but there is often a penalty for this. Early access penalties tend to mean forfeiting at least one year’s interest. If you have held the bond for less than a year and haven’t yet earned a full year’s interest, the penalty charge could be deducted from the original investment. Before investing in a fixed rate bond, you should always be as sure as possible that you won’t imminently need the money.
Yes. A number of suppliers offer bonds that can be held in joint names. However, the total number of joint bond account holders is usually capped at two.
Access to deposits in a fixed rate bond varies from supplier to supplier. Some will 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. If the bond is held in joint names the situation is more straightforward: the bond will continue until maturity in the name of the surviving bondholder.
Now read: How to choose a savings account
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Last updated: 24 April, 2018
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