What are savings bonds?

What is a savings bond?

A savings bond is a savings account where you agree to lock your money away for a set period, usually for a fixed return.

You open the bond with a bank or building society and usually deposit a minimum lump sum, such as £500 or £1,000.

You’ll then typically be paid a guaranteed interest rate for the length of the bond, which usually lasts between six months and five years. 

The longer you lock your money away, the better the return you’ll get. But because the interest rate is fixed from the start of the bond, you won’t be able to benefit if interest rates rise while your cash is locked up.

How do savings bonds work?

1. Generally, the longer you commit to locking your savings away, the higher the interest rate will be

2. Some fixed rate bonds can be opened with as little as £1, while others will require up to £1,000. How much money you’ll need to open a savings bond will depend on the provider and individual savings product

3. You won't usually be allowed to top up your savings bond once you’ve made your initial deposit

4. You’ll earn a fixed amount of interest while the money is in the savings bond

5. If you must access your money early, you’ll need to write to your provider. Asking for an early withdrawal is likely to lead to a penalty charge or loss of interest

6. At the end of the term you can withdraw your money and interest or move it to another bond. Always read the terms and conditions before applying

What are the different types of savings bonds?

Savings bonds all operate in similar ways, but there are a few different types of bonds you can take out.

• Fixed rate savings bonds. You open the bond and deposit your money in return for a fixed rate over the term. The higher the interest rate, the bigger your return.

• Tracker bonds. Rather than the interest rate being fixed, it tracks the Bank of England base rate, for example. This means that your returns aren’t set, but because you’re still agreeing to lock your money away for a given period, you should earn more than through a regular savings account.

• Income bonds. The money you make through interest is paid to you at regular intervals as a form of income. Often savers put far higher amounts in income bonds and they may be able to withdraw the principal sum without notice or penalty.

• Government bonds. These are fixed rate bonds offered through National Savings & Investments, the only bank in the country that's backed by a government department, the HM Treasury.

• Premium bonds. Backed by the Government, you earn no interest on premium bonds, but every month there is a prize draw and you could win up to £1m.

• Green bonds. Work the same way as other bonds with a fixed return, but the money is invested in projects such as renewable energy, conservation, clean transportation and protecting against climate change. Green bonds can also offer tax incentives to savers.

How long should I fix my savings bonds for?

The golden rule with bonds is that the longer you are prepared to lock your money away the higher the potential returns.

Just be confident you won’t need the money in the interim period because the penalty you may face is likely to wipe out much of the interest you will earn.

The most common lengths of bonds are one, two, three and five years, but you might be able to find both shorter and longer terms. 

Will fixed rate bonds give a better return than the stock market?

It’s not possible to say whether fixed rate bonds will give a better return than the stock market because no-one can be sure how investments will perform in the future.

Historically, the stock market has outperformed savings for returns over the long term, but this doesn’t mean it will remain the case. The stock market can also be volatile in the short term.

An advantage of fixed rate bonds is that you know how much you’ll receive at the end of the term and can plan accordingly without taking on any risk.

What are the pros and cons of savings bonds?

There are a range of things to consider with fixed rate bonds, including:

Pros  

• A higher return. One of the biggest benefits of savings bonds is that they usually offer higher interest rates than other savings accounts

• A guaranteed return. If you get a fixed-rate savings bonds, you will know at the beginning exactly how much you’ll get when the account ends (matures)

• No risk. You will get your original capital back at the end of the term as well as any interest you’ve accrued

• Attractive rates. While you’ll aim to get the best rate possible when opening the bond, it could look even more attractive if interest rates in the wider market start to fall because you have locked in to a better rate

Cons

• Interest rates may rise. Returns on fixed-rate bonds won’t change over time, so the rate you’re locked into won’t look so attractive if rates in the wider market increase

• You tie up your cash. Money in a savings bond has to be locked up for a fixed period. This could be a problem if you need the cash, for example in an emergency

• Penalties can be costly. You can’t access your money until the end of the account term without paying a penalty. Early withdrawal penalties are usually in the form of loss of interest

Will I have to pay tax on my savings bonds?

Due to the personal savings allowance you may not need to pay any tax on your savings bond. Everyone has a personal savings allowance which enables you to earn interest on your savings free of tax up to a certain limit. Your allowance will depend on what rate of income tax you pay. 

There are three income bands in the UK. If you’re on the first two; basic rate and higher rate, you don’t have to pay income tax on a big chunk of the interest you earn. However, if you’re an additional rate taxpayer, you don’t get a savings allowance.

What are National Savings and Investments bonds?

The UK government offers a few bond options through its National Savings brand:

• NS&I income bonds: Income bonds are variable-rate savings products. The government can – and does – change the rate of interest, but it tends to be fairly competitive. You need a minimum of £500 to open an account, but you can withdraw money in increments of £500 with no notice and at no penalty to your interest. Interest is also calculated daily, so it grows slightly faster than most other accounts

• NS&I premium bonds: Premium bonds are essentially a lottery. You’ll be entered into a prize draw every month for every premium bond you own. Monthly prizes range from £1 to a jackpot of £1 million, but the odds work out to an annual average return of 1.4%. Because it is a prize draw you might get a much better return one month, or you might win nothing at all. All winnings are tax-free, and you can’t lose money – though you’re not guaranteed to make anything either

Are savings bonds right for me?

Whether or not a fixed rate savings bond is right for you will depend on what interest rate you want and when you might need the cash.

Savings bonds can work well if you have a savings goal in mind – such as a wedding, a car, a holiday or your child’s education, for example.

Saving bonds typically suit people who can afford to lock away a portion of their money for a fixed time. They might be less attractive to those who have had cash flow issues in the past, or if you’re in insecure employment – in this case you might want to consider an easy-access savings account or a cash ISA instead, to give you more flexibility to access money in an emergency.   

If you need more help deciding, the MoneySuperMarket savings decision tree could be helpful.

Other useful guides

We have a range of detailed guides for savers, such as:

Guide to NS&I

High interest savings accounts guide

How safe are your savings?

Compare fixed rate bonds with MoneySuperMarket

Finding your next savings bond is easy with MoneySuperMarket. When searching for a new savings account you can easily see the interest rate, maximum or minimum deposit amount and any other terms and conditions.

You can use our handy filters to narrow down your options and pick an account that’s most suited to you.

When you find the savings account or fixed rate bond you want, all you need to do is click through to the provider to complete your application online.