Fixed Rate Bonds Guide
What are fixed rate bonds?
Fixed rate bonds are usually savings accounts that pay a set rate of interest, agreed at the outset, for a certain term.
The interest rates available are generally higher than those on easy access accounts – especially if you opt for a fixed rate bond that lasts for two years or more.
You will, however, pay a penalty if you need to make a withdrawal within the fixed term.
Consequently, fixed rate bonds are only suitable for savers who are prepared to lock their cash away for a few years.
Thanks to the introduction of the new Personal Savings Allowance (PSA) in April 2016, banks and building societies now pay interest on all savings accounts gross, or before any tax is deducted. The PSA means that basic-rate taxpayers can earn £1,000 of savings interest without the taxman taking a slice, and higher rate taxpayers can earn £500. Additional rate taxpayers are not eligible for a PSA. If the interest you earn exceeds these limits, any tax you owe will usually be collected via the Pay As You Earn (PAYE) system or via your self-assessment tax return.
What types of fixed rate bonds are available?
Most banks and building societies offer fixed rate bonds lasting for anything from six months to five years.
You will need to invest a lump sum to benefit, as you cannot generally add to your initial deposit as you might with an easy access account.
To qualify for some of the most competitive accounts, you may need a large amount. Some have minimum deposits of £10,000 or even £25,000.
However, with more than 100 on the market most of the time, you should be able to find good deals that require as little as £1,000.
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.
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.
Why should you use MoneySuperMarket.com to compare fixed rate bonds?
As with all types of savings accounts, the rates available on fixed rate bonds vary widely. What’s more, the best ones often sell out – or reach their target – within a week or two.
MoneySuperMarket.com allows you to compare the whole fixed rate bond market in a matter of seconds. It also offers information about how to open a fixed rate bond, most of which can be opened online, over the phone or in a branch. You can therefore find the best deal quickly and easily, whether you want an account that lasts for six months or five years.