Best fixed-rate bonds

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. If you really do have to access the funds, it may be a slow process and you’ll incur a penalty (usually forfeiting interest earned).
• Interest. The interest will either be paid out “on maturity” when your lump sum’s released, or, in some cases, interest can be “paid away” monthly to an account that you nominate. It’s more lucrative in the long run if the interest is allowed to compound in the bond itself itself, but some people will be looking to generate a monthly income instead.
• 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. Given that inflation is at a pretty historic high level at the moment, you may want to think about if you’re going to be happy to tie your money up with in a fixed-rate bond for several years.

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 £5,000 in savings and you go for a 2-year fixed-rate bond. These days, top deals pay around 4% a year on these accounts, so you’ll get around £200 a year. Certainly better than nothing but not huge. If you had the money in an easy access savings account, you could expect a top rate of 2.5% or around £125. So then the question is whether it’s worth losing access to your money for 2 years for the benefit of £75.

If you have, say, 4 times that, then it’s a slightly 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 £800 a year, vs £500 with a 2.5% easy-access savings account. That’s a £300 difference per year, which may be worth the hassle after all.

How to choose the best fixed-rate bonds

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 to tackle it:

• How long can you do without the money? A longer period generally means a better rate (with the caveat that rates could rise when your money’s locked in).
• 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.