Fixed rate savings accounts: a simple guide

Fixed rate savings accounts

If you’re setting aside money for a special occasion, or just want a guaranteed interest rate, a fixed rate savings account might be the answer. The main drawback is that you won’t have easy access to your money – but if that’s okay with you, read more here and find a fixed rate savings account that suits you.

What is a fixed rate savings account?

Fixed rate savings accounts are sometimes also called fixed term accounts or fixed rate bonds. As the names suggest, they’re accounts that give you a fixed rate of interest over a fixed period of time (the term). In order to get that level of interest, you have to keep your money in the account and not touch it for that fixed period.

Because you’ve agreed to lock in your money, the interest rates you get in a fixed rate savings account tend to be slightly higher than you’d usually get in an easy access savings account.

Who are fixed rate savings accounts aimed at?

They’re aimed at people who are able to lock their savings away without needing quick access to their money. They’re ideal if you’re setting money aside for a specific use – for example, to pay for a wedding or holiday. You can choose a term from a provider to suit you so that the money will be available when you need it. Some fixed rate accounts might offer one or two-year terms, while others offer a range of terms that are as short as just a few months.

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

And the main drawbacks of fixed rate savings accounts:

  • 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 goes up 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

What are the term lengths on fixed rate savings accounts?

The most common terms for both fixed rate savings accounts and fixed rate bonds are one to five years. These are commonly referred to as short-term fixed rate bonds. However, and this varies between account providers, you may find long-term fixed rate accounts and bonds of up to 10 years, possibly beyond, for some accounts.

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. For 2022/23, this is £1,000 for basic rate taxpayers and £500 for higher rate taxpayers.

What should you look for in a fixed rate savings account?

The first thing to do when you compare fixed rate savings accounts is find the right balance between interest rate and term length. Usually, if you’re willing to leave your money for a longer term, you’ll get a higher rate of interest on your fixed term savings. But make sure you won’t need the money during the term, or you could lose out. Pick the balance that’s right for you.

Another factor is account management, if you have a particular preference for online or in-branch access – though this is less important with fixed term savings than it is with instant access accounts. You won’t need to do much management until the end of the term. 

Some fixed rate accounts will also specify a minimum or maximum deposit – so if you want a place to store a large amount of money, you need to be aware of that. Though if you put more than £85,000 in a single bank or building society, then any money over the limit won’t be protected by the Financial Services Compensation Scheme (FSCS) or its equivalent for some EU-registered banks if the bank or building society goes bust. 

You need to be careful as the amount is set per financial institution and some financial groups might count as one. For example Lloyds, Halifax and Bank of Scotland count as one institution, as do HSBC and First Direct, whereas RBS and NatWest count as two.

If you choose to save using a foreign-owned bank, you should make sure you understand how your money is kept safe.

The FSCS has advised that its financial protection will remain for customers living in the UK who have money in UK-authorised companies, now the Brexit transition period has ended.

But it has warned that FSCS protection could change for customers who live - or who have their business - in the European Economic Area (EEA). That economic area includes Norway, Iceland and Liechtenstein, plus all EU countries.

For more information on the rules for FSCS protection that are now in place, visit the Financial Services Compensation Scheme website.

What are fixed rate bonds?

Fixed rate bonds are just another name for fixed rate savings accounts. They work exactly the same, allowing you to lock your money away for a fixed period at an agreed interest rate. During this period, you won’t be able to access your money.

How do fixed rate bonds work?

If you agree to lock your money away for a longer term, you’ll usually be rewarded with a higher annual equivalent rate (AER), which is the amount you can earn if your money is left in the account for a full year. Fixed rate bonds also tend to offer better interest rates than instant access savings accounts.

Terms are most commonly available between one and five years, but some providers may offer even longer terms. Once this term ends, you’ll be able to access your money again. If you need to withdraw your money before the agreed term ends, you’ll usually pay a penalty fee.

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, however, 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.

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. If you’re looking for the best fixed rates, these are usually reserved for the accounts and bonds with the longest fixed terms. So, you’ll normally get a higher rate for agreeing to lock your money away for five years than you would for two. However, this isn’t the case 100% of the time, so don’t just assume this when looking for deals.

Of course, locking your money away for a longer term comes with that trade off. You won’t have access to your money for that agreed period, so you need to be sure that you’re financially secure enough to manage without that money. If you need to withdraw it before the period ends, you’ll typically incur a penalty fee, with some being significant enough to leave you with less than you started with, depending on how early you withdraw. Consider the term length very carefully, before agreeing to tie your money up for years.

When looking for the best deals, you should also keep in mind any minimum deposit requirements. These can vary between providers, but you can expect to find minimum deposits of around £500. Check carefully for these limits before going any further.

You may also want to compare deals based on how they pay out their interest. Most fixed rate bonds will allow you to choose whether your interest is paid monthly or yearly. If this is important to you, it’s worth thinking about when comparing.

With all this in mind, a great place to start is by comparing fixed-rate accounts and bonds through Compare the Market. 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 savings, 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.

What other accounts are there to consider?

You could also think about:

  • Cash ISAs and Fixed Rate ISAs for tax-free savings interest
  • Lifetime ISAs if you’re saving for retirement or your first home
  • Junior ISAs if you’re saving for your child’s future.