What is a savings bond?
A savings bond – sometimes called a fixed rate savings account – pays a fixed rate of interest for a set term. So, for instance, you may earn interest at a rate of 2.5% a year for three years.
The terms of the bonds vary, but you can usually choose from an account that pays a fixed rate for one, three or five years.
And the general rule is - the longer the term, the higher the rate of interest – so lock your money in for five years and you’ll get a better rate than if you locked it away for one.
However, the words to look out for here are ‘lock away’ – once you put your money into a bond you can’t normally access it again until the end of the term. At least notAnd if you can, it won’t be without incurring a penalty in the form of a charge or a loss of interest.
Some bonds will offer a limited amount of penalty-free withdrawals but this will probablyis likely to be reflected in a lower interest rate – so if you think you’ll need to get your hands on your cash in the near future, for instance, if you’re saving to cover the cost of any odd jobs –
- not that type of odd job, odd jobs such as emergency house or car repairs - then a savings bond is probably not the best account for you.
You’ll In this case, you’ll most likely be better off with an easy access account.
All fixed rate bonds come with a minimum deposit which can range from £1 to £100,000 and beyond, but you should expect to pay in a minimum deposit upwards of £500 to get the better rates.
And once you’ve opened the account, you’re generally not allowed to top it up – meaning you can’t drip feed money into it as you can with other accounts. If you’re looking to gradually build up your savings pot, you may find a regular savings account more suitable.
If you’re saving towards something specific then aand have cash upfront, then a fixed rate savings bond could be a good option because it allows you to work out how much interest you will earn over the term, knowing that amount is guaranteed – you don’t have to worry about fluctuating interest rates.
This can also prove to be something of a Skyfall…sorry, downfall…as you could be out of pocket if interest rates rise and you’re stuck on a low rate – and the longer your money’s locked away, the greater the risk of this happening.
On the other hand, the longer you lock your money away, the better the rate of interest you’ll be offered, so it’s a bit of a calculated gamble.
In short, a fixed rate bond is really only suitable if you’re prepared to lock a substantial amount of money away for the full term.
And when choosing an account keep your savings goal in mind and shop around to make sure you get the best product deal to suit your needs.