Best 1-year fixed-rate bonds

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If you’ve got a lump sum to save and are looking to get a better interest rate than you might get with an easy access savings account, fixed-rate bonds are worth considering – but only if you’re sure you won’t need to touch the money for a while. If that sounds like you, then as well as finding the best rates going, you’ll want to know the options and features to consider before you make your choice. So we’ve covered these here.

What are 1-year fixed-rate bonds?

A fixed-rate bond is a type of savings account. When you deposit your money in a fixed-rate bond, it’s locked away; you typically can’t add to it or access it. Or if you can access it, there will be a penalty for doing so.

In return for the certainty of having your money for all that time, banks usually offer a better rate of interest than on their easy access savings accounts (where you can take out the money any time). What’s more, the rate of interest you get doesn’t change for the period of the bond as it can with an easy access account.

There are fixed-rate bonds for longer periods than one year – two, three, four and five years or more – and a few for just six or nine months.

Bonds with a 1-year term will generally pay a better rate than 9-month (or shorter) terms but a worse rate than 18-month (or longer) terms.

By opting for a 1-year bond you can get a benefit from an extra 1.75% interest (6.5% vs 4.75%) compared to a 9-month bond.

Bonds can be a good way to ring-fence a chunk of money for a special event that’s a year or more away. But if you think you might need access to the money sooner, then there are other options.

These days, some current accounts can pay interest that rivals savings accounts, so before you head straight to a bond, see whether there are other types of account that offer more, including those that don’t tie up your money. The advantage of a bond over a current account is that many current accounts cap the amount of money that they’ll pay decent interest on. So if you have more than a few thousand pounds, and can lock away the money, it’s worth considering a bond.

What types of bonds can you choose for 1 year?

Bonds have different features and eligibility criteria. Here are some key differences.

• Minimum deposit. The minimum deposit for a 1-year fixed-rate bond can vary from £50 up to £25,000 or more.
• Existing vs new customers. Banks offer certain bonds to existing current or savings account customers only. However, there are plenty of providers offering bonds to new customers, and the transfer is typically to and from a “nominated” current account.
• Online only. Some bonds are web only – you must apply online and operate them online. Other bonds can be opened online but you have the option of managing them via an app.
• Initial top-up payments. Some bonds allow you to top-up your deposit within the first few weeks; with others, you open the account with one lump sum and then can’t add any more.
• Interest payments. Interest can be paid monthly or on the anniversary of the bond.

How to choose the best fixed-rate bonds for one year

1. First, be sure you won’t need to access the money for the period in question (a year, in this case). If you have any doubt, it’s best to go for a shorter time period, or look at alternatives such as an easy access savings account or ISA or a current account that pays interest.
2. Compare deals for your deposit amount. Some accounts have a minimum deposit of several thousand pounds, but others allow far lower amounts. Don’t assume a higher minimum deposit always gets you a higher interest rate, though this is often the case.
3. Check for the rate, when interest is paid, and, if you need this, whether you have the flexibility to make additional top-ups in the first few weeks.
4. Look out for incentives – some providers, such as Raisin, have been known to offer decent sweeteners to attract your custom.
5. Interest will be paid tax-free, usually on the anniversary when the bond matures. Remember that if you’re a basic-rate taxpayer, you can earn up to £1,000 in interest each year tax-free. For higher-rate taxpayers, the figure is £500. Additional rate taxpayers have no tax-free allowance. Interest from money deposited into an ISA up to the annual limit is tax-free.

How much money do you need to open a 1-year fixed bond?

The typical minimum deposit for a bond is £1,000, although there are a few bonds with a minimum of £500 or less. The maximum deposit can go into millions.

Banks typically ask you to pay the minimum deposit within 30 days of opening the account – and will close the account if you don’t. Some accounts allow you to make the minimum deposit and top it up in the first few weeks.

Is your money safe in a 1-year fixed-rate bond?

If you deposit money in a bank (meaning it has a banking licence) that’s regulated by the UK’s Financial Conduct Authority, your savings will be covered to the tune of £120,000 if the bank goes bust under the Financial Services Compensation Scheme. There are a few banks which rely on a “passport” to operate in the UK and are regulated in their home country. If those went bust, you’d be relying on regulatory arrangements in the bank’s own country.

Many people don’t realise that the £120,000 is per institution, so if you have accounts in two banks that are in the same group – say, RBS and NatWest – then the total cover is just £120,000 across both accounts.

Additionally, 1 year isn’t long enough to reliably expect a return from, say, stocks and shares investments, so a fixed-rate bond trumps shares for safety in this relatively short term.

What happens at the end of the year?

Hooray – you can access your money again! The bond has now “matured” and the provider will typically pay you the interest at this point. You can now choose whether to have your money paid into your current account, or renew with the same provider by choosing another deal that it’s offering, which may have a different rate.

Is a 1-year fixed-rate bond right for me?

This will depend on lots of factors, such as what you plan to use the money for, when you’re likely to need it, and whether you have other savings.

It’s a good idea to have some money in an easy access account in case of an emergency. Once you’ve got some savings tucked away in an easy access account, a fixed-rate bond could be worth considering if you’re sure you won’t need access to it during the year.

Fixed-rate bonds can be a great option if you want to earn interest on a lump sum that you plan to use for a specific savings goal later down the line.

An overview of our 1-year fixed-rate bonds comparison

Pros and cons of 1-year fixed-rate bonds

Bottom line

A 1-year fixed-rate bond can make sense if you have a lump sum that you want to earn interest on without locking your money away for too long. Perhaps if you’re saving for a house deposit and you know that you won’t be ready to buy a home for at least a year.

If you haven’t used your tax-free cash ISA allowance, consider fixed-rate cash ISAs (and if your lump sum exceeds the ISA allowance, consider splitting it across 2 accounts).

Frequently asked questions

• How many fixed-rate bonds can I have?

  There’s no limit to the number of fixed-rate bonds you can have. Some providers might limit the number of fixed-rate bonds you can hold with them, but there’s nothing stopping you from opening other fixed-rate bonds elsewhere.

• Do I have to pay tax on fixed-rate bonds?

  It will depend on which income tax band you’re in and how much interest you earn. Thanks to the personal savings allowance, all basic rate taxpayers can now earn up to £1,000 a year tax-free on any interest from savings and current accounts. Higher rate taxpayers can earn up to £500, while additional rate taxpayers have no personal savings allowance.

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Written by

Liz Edwards

Editor-in-chief

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Liz Edwards has been a consumer writer and editor for more than 20 years. She led award-winning teams at the campaigning publisher Which?, and has covered a range of consumer rights and personal finance topics including pensions, credit, banking and insurance. Liz has appeared frequently in national media such as The Sun, Metro, HuffPost and The Independent. She loves to cut through waffle to give consumers the real lowdown. And she loves puns. See full bio

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Liz has written 52 Finder guides across topics including:

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