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Fixed-rate savings bonds: a simple guide

What is a fixed-rate bond?

A fixed-rate bond is a type of savings account that offers a set amount of interest on your money over a set length of time – known as the ‘term’. By agreeing to lock your money in a guaranteed interest account, you can benefit from a higher return on your savings.

Your provider can’t change the interest rate during the term. In exchange, you won’t be able to touch your money. If early access to your funds is allowed, it will likely come with a penalty charge.

How do fixed-rate bonds work?

Before deciding whether fixed-rate bonds are the best option for you, it’s important to understand how they work:

  1. Choose the length of the bond term – one-year fixed-rate bonds and five-year fixed-rate bonds are among the most common terms available. Some providers may offer even longer terms.
  2. Choose the amount you want to deposit – most fixed-rate bonds only allow you to make one lump sum deposit when you open the account. You can’t usually top it up later on.
  3. Wait for your bond to mature – once the bond term comes to an end, you can withdraw your money plus the interest it’s earned. If you need to withdraw your money before the agreed term ends, you’ll usually pay a penalty fee.

What are the term lengths on fixed-rate savings accounts?

The most common term lengths are:

  • One-year fixed-rate bonds
  • Two-year fixed-rate bonds
  • Three-year fixed-rate bonds
  • Five-year fixed-rate bonds.

However, there are long-term fixed-rate bonds available. Some providers offer fixed-rate accounts and bonds for up to 10 years, or even longer.

While long-term bonds could offer a higher interest rate, you’ll need to decide how long you can go without needing to access the money. If there’s a possibility you’ll need your funds sooner, it might be best to go for a short-term fixed-rate bond.

Will I have access to my money?

A fixed-rate bond will restrict your access to your money. By agreeing a fixed-term period, you’re essentially locking it away for that time. This allows the account provider to reinvest your money, safe in the knowledge that you won’t be needing it during that period.

If you later decide that you need to access it, you’ll be breaking the agreed term on the account, which will mean you’ll need to pay a penalty fee. These penalties vary between account providers. If you’ve not earned much in interest before deciding to withdraw, you may leave the account with less than you started with.

Check the terms of the account carefully before opening one, so you’re fully aware of these penalties.

What are the pros and cons of fixed rate savings accounts?

These are the key advantages of fixed rate savings accounts:

  • Higher interest than you get with most instant access accounts
  • A guaranteed rate – making it less risky than investing in the stock market or in an account with a variable interest rate
  • Easy forward planning – you know exactly how much you’ll get at the end of the fixed term.

The main drawbacks of fixed-rate savings accounts are:

  • You can’t access your money if you need it before the end of the fixed term – or if you can, there could be a hefty penalty to pay.
  • You might miss out on higher rates if the Bank of England base rate rises during the term and interest rates on savings accounts that aren’t fixed (variable or instant access for example) are raised in line with this

Why might you choose fixed-rate savings bonds?

Fixed-rate savings bonds could be a good option if:

  • You have a few hundred pounds in cash, and you’re convinced you won’t need access to it for the length of the term.
  • You want to set aside the money for a specific use in the future, such as a wedding or a holiday.
  • You want the best return possible, and feel you’d get a higher interest rate than with a regular savings account.
  • You want a safer type of investment without the risk of fluctuating interest rates.

What are the alternatives to fixed-rate bonds?

If you’re not sure whether fixed-rate bonds are the right saving option for you, there are alternatives you could explore. These include:

Easy access savings accounts – you can pay in and withdraw your money whenever you want. However, the interest you’ll earn is usually lower than for fixed-term accounts.

Regular savings accounts – designed for people who want to add small amounts of money to their savings pot on a regular basis. Interest rates can be favourable but there can be rules about how much you can put in and take out each month.

Lifetime ISAs – designed for people under 40 to help them save for a house deposit or retirement. You can deposit up to £4,000 each year and the government will add a 25% bonus to your savings up to a maximum of £1,000 per year.

Notice accounts – a kind of cross between an easy access and fixed-rate savings account. As the name suggests, you’ll need to give notice before you can access your money.

Will I be taxed on fixed-rate savings accounts?

A fixed-rate savings account or bond isn’t the same as a fixed-rate ISA. This means that the interest earned isn’t protected against tax. However, your Personal Savings Allowance will allow you to earn a specific amount in interest, tax-free. This is currently £1,000 for basic rate taxpayers and £500 for higher rate taxpayers.

How to find the best fixed-rate bonds

The best fixed-rate bond is specific to you, so there isn’t a universal best account. However, there are a few things to consider before deciding on which account would work best for you:

  • Interest rate – if you’re willing to leave your money for a longer term, you’ll usually get a higher rate of interest on your fixed-term savings.
  • Term length – consider this very carefully. Are you comfortable enough to manage without the money for the length of time it’s locked away?
  • Deposit requirements – fixed-rate bonds typically have a minimum and maximum limit you can deposit. Check carefully, as limits can vary between providers.
  • Interest payments – most fixed-rate bonds allow you to choose whether your interest is paid monthly or yearly. If it’s important to you, it’s worth thinking about when comparing.
  • Penalty fees – check the terms and conditions for any penalty fees you may have to pay if you withdraw your money early. These can be pretty hefty.

With all this in mind, a great place to start is by comparing fixed-rate accounts and saving bonds through Comparethemarket. We can compare interest rates and fixed terms to help you quickly compare deals and find the right fit for your savings.

Frequently asked questions

Will my money be safe?

As long as your account provider is regulated by the Financial Conduct Authority (FCA), your eligible deposits are protected for up to £85,000, per person, per bank, by the Financial Services Compensation Scheme. If your account provider were to go under, you’d receive compensation for up to this amount. If you’re looking to invest more than this amount in savings accounts, we’d recommend spreading your savings across multiple account providers, to protect your money as best as possible.

See more on keeping your savings safe.

What is meant by cashing in savings bonds?

Once your fixed term ends, it’s time to cash in your savings. You’ll normally get a letter or email to tell you when the term is about to ‘mature’, which is just another way of saying it’s coming to an end.

When this happens, you’ll have two options:

  • Cashing in – this is withdrawing the full amount and closing the account
  • Reinvesting – this could be reinvesting the full amount, the full amount plus some extra, or withdrawing some and reinvesting the rest. Your account provider will likely encourage you to reinvest in some form.

How to cash in fixed-rate bonds

If you decide to cash in and withdraw your saving bonds after your fixed term ends, the process is quite simple. You’ll just need to fill out a form to close the account and then wait for the money to be transferred. You can either ask for the money to be directly deposited into another account, or sent to you as a cheque. You should receive your money in about a week, but a direct bank transfer will normally be quicker than waiting for a cheque to arrive.

Where can I put my money instead of a bank?

In recent years, peer-to-peer (P2P) investing has grown in popularity. By cutting out the middleman, P2P platforms can often offer more favourable interest rates than traditional savings accounts.

However, P2P investing can be risky. Your savings won’t be covered by the FSCS guarantee, so if your provider goes bust, you could lose the lot.

If you want a risk-free investment and the security of FSCS protection, a fixed-rate bond could prove to be a safer option.

The content written in this article is for information purposes only and should not be taken as financial advice. If you require support on the products discussed here, please speak to your bank/lender or seek the advice of an independent professional financial advisor. We also have more information on our Customer Support Hub.