Forget about your savings for a while and get a higher interest rate with fixed rate bonds.
If you’re looking for a way to make your savings go further without entering the investing minefield, fixed rate bonds can be a tempting option as long as you’re not going to need the money anytime soon.
Let’s see how they work and how to choose and compare them.
What are fixed rate bonds?
Fixed rate bonds are a type of savings account. As you may have guessed, they pay a “fixed” interest rate, so you know from the start how much you’re going to get on your savings.
Their main feature is that your money is locked away for a pre-defined period of time (normally between one and five years). You can’t withdraw it. Since the bank has the certainty that your money will be at its disposal for that period of time, it’s able to offer you a better rate than what you’d get with an easy-access savings account.
How do fixed rate bonds work?
Once you’ve compared and picked the fixed rate savings account you want to open, things are pretty straightforward.
- Application. With most financial institutions, you can apply online by putting in your data and going through an ID check. Some financial institutions don’t allow you to open a fixed rate savings account with them if you don’t have a current account too. If the account you want to open is with a bank you’re already a customer of, you can often do it directly from your banking app.
- Deposits. Once the account is open, you have a short period of time to fund it (normally less than one month). After that, you can’t make any more deposits or withdrawals to your account until it matures.
- Interest. The interest can be paid annually or monthly (or sometimes at the end of the whole period). In most cases it’s paid directly into the account itself, so you can only access it at the end anyway, but you’ll earn interest on your interest while the account matures. However, some accounts give you the option to have the interest paid into a separate current account, in which case you can access it but won’t earn any interest on it.
- Withdrawals. We can’t stress it enough: only put money into a fixed rate savings account if you’re 100% sure you won’t need to access it. Because no. You. Cannot. Withdraw. Your. Deposit. In. Advance. More precisely, in some cases, you just can’t at all; in others, you’ll be charged a fee and your account will be closed.
- When the account matures. You’ll be able to access your money and you usually can choose to have it paid back into your current account (and then potentially look for a new deal) or “renew” your current deal by opening a new fixed rate bond with the same financial institution. There’s no guarantee you’ll get the same interest rate as before though.
Should I get a fixed rate savings account?
The first thing to do is make sure a fixed rate savings account really is what you want. The interest rate is better than what easy-access accounts offer, but you’re precluding yourself access to your money, so always consider whether it’s worth it or not.
As a rule of thumb, fixed rate bonds can be convenient if you have a fairly big chunk of money to deposit in them. If you don’t, they’re probably not worth the risk.
Let’s do a bit of maths. Say you have £2,000 in savings and you go for a two-year fixed rate bond. These days, top deals pay around 2% a year on these accounts, so you’ll get around £40 a year. Certainly better than nothing, but you may be able to get a similar result with a good interest-paying current account. Not to mention the fact that the best easy-access savings accounts easily make it to 1.3-1.4%, which on £2,000 would make around £26 a year. That’s £14 less than with a top two-year fixed rate bond: is it worth losing access to your savings for two years in exchange for the equivalent of three free pints a year?
If you have, say, tenfold, it’s a different story. First of all, current accounts normally only pay interest on the first few thousand pounds of your balance. Moreover, if you have £20,000, you’d make £400 a year with a 2% two-year fixed rate bond, and £260 with a 1.3% easy-access savings account. That’s a £140 difference per year, which may be worth the hassle after all.
How to choose your fixed rate bond
If you do decide that a fixed rate savings account is what you need, comparing and picking the right one for you shouldn’t be excessively complicated. Here’s how you should tackle the problem:
- How long can you do without the money? That’s the first thing to ask yourself. A longer period generally means a better rate.
- Compare rates. Obviously, the higher the better.
- Check the eligibility criteria. Make sure you can apply for the account you’re looking at. With some banks, you’ll need to open a current account first. Also, keep in mind that most fixed rate savings accounts have a minimum deposit (often not less than £500).
- Look at where/when the interest is paid. Monthly, annually or at the end? Into the account itself or somewhere else?
- How much are you going to earn? This will basically depend on the interest rate, but to make a final decision it’s worth trying to figure out how much you’ll get out of the account with the amount you can afford to put aside.
Are savings bonds safe?
They normally are. Always make sure that the deal you’re looking at is covered by the FSCS (Financial Services Compensation Scheme), which will protect your deposits up to £85,000 even if the financial institution providing the account were to go bankrupt.
If you have more than £85,000 in savings, it is advisable to spread it between different accounts, just in case.