What are Fixed Rate Bonds?
When trying to save money for the future, there are several options open to cash savers. Options include instant access savings accounts, easy access savings accounts, notice savings accounts, fixed rate bonds and structured deposit plans. With interest rates at the time of writing at all time lows many savers are looking for a range of best saving plans. For savers who are prepared to tie up capital for a year or more higher rates of interest are available from savings providers on fixed rate bonds.
A fixed rate bond is a way of gaining a fixed rate of higher interest on your savings for a fixed period of time, typically between one and five years. Generally speaking the longer your savings can be locked away, the higher the interest rate you can get on your money. Some providers offer fixed rate bonds within a Cash ISA so you benefit from tax free interest returns.
Fixed rate bonds normally have a minimum subscription age of 18 but some providers offer fixed rate bonds to younger savers.
How do Fixed Rate Bonds Work?
Normally there is a minimum commitment for depositing money into a fixed rate bond - usually around £1,000, but this can be more. This makes bonds unsuitable for those who wish to top up a savings account in small increments, as this is not usually possible beyond the first lump sum, therefore could look into alternative savings and investments plans. Having a fixed term means that bonds have a maturity date at which time you will be contacted by your savings provider and provided with options on how you wish your money to be returned to you - you may be given options of putting the money into a new bond in which case you should always shop around before accepting a savings deal offered by an existing provider as the rate of interest may or may not be competitive.
With a fixed rate bond providers do not normally allow you to access your money during the term and if they do there are normally conditions which may involve a loss of interest so ensure you read the small print before you sign up. Some fixed interest providers will allow one withdrawal a year without penalties.
Interest paid on your savings is treated as income and you may have to pay tax on it depending on your circumstances. If you don’t pay tax you can receive interest gross if you complete HMRC tax form R85. Some accounts will pay interest gross and it is up to you to declare any tax owed to the Inland Revenue.
Fixed rate bonds are cash deposit based and you will get back your original deposit plus any interest owed unless the bank or building society gets into serious financial difficulty. In the unlikely event that this happens the Financial Services Compensation Scheme would pay compensation of up to £85,000 per account holder per authorised institution.
Comparing Fixed Rate Bonds for Short, Medium & Long Term Savings
Essentially, the length of the bond determines how much interest will be paid. See our tables above for latest fixed rate deals. Some fixed rate bonds pay interest on maturity rather than on a monthly or annual basis and in this respect the tax you pay will be determined by your tax status at that point. This can be useful for tax purposes if you know your tax status is going to change in future.
The length of term you opt for should be carefully considered. If there is a chance you may need your capital earlier consider a shorter deposit term.
1 year bonds
– typically offer better rates than instant access savings account, and with only a year to lock up your cash they can provide an attractive option to instant access and notice accounts which require notice on withdrawals ranging from 30 to 120 days.
2 year bonds
– As you would expect generally provide better rates than 1 year bonds. Interest penalties will normally apply if savers wish to withdraw their cash before the bond maturity date.
3 year bonds
– Will generally provide better rates of interest, provided that savers are happy for their savings to remain tied up for this length of time.
4 year bonds
– Typically bond providers offer 1,2,3 and 5 year terms so 4 year bonds are less common.
5 year bonds
– Competitive rates abound for longer term deposits, but the risk of depreciation due to inflation is also greater.
Points to consider when choosing a Fixed Rate Bond
The length of time that savers choose to deposit their money depends on personal financial timeframes and other budget and savings considerations. If you need rapid access to your cash, bonds are possibly not the best savings option – it might be preferable to look at an alternative savings options or just an instant access savings accounts.
Minimum deposits can vary from £500 to over £2000. Make sure that you are happy to part with that amount of money for a longer period of time! It is worthwhile having a five-year plan of projected expenses – such as mortgages, car purchases, or planning for a family or retirement – to ensure that you will not need access to your fixed rate bonds account.
Withdrawals are either not permitted or restrictions will apply. Read the bond provider terms and conditions so that you know what you are getting into. Some bond providers for example will allow one withdrawal during the bond term without penalties.
The payment of interest on the bond can also vary- some offer monthly interest, others quarterly or annually, and some only pay at the end of the agreed term. Choose a fixed rate bond that fits in with your requirements for the best rates of high interest.
Tax is payable on interest accrued unless you are a non tax payer in which case you can receive interest gross if you complete HMRC tax form R85. Alternatively it is often possible to take a Cash ISA fixed rate bond (current cash ISA allowance for 2015/16 is £15,240 per individual) from which interest can be taken tax free. The new 2016/17 Cash ISA allowance is set to remain at this level.
If you have cash ISAs from previous tax years you may be able to transfer to a new Cash ISA provider offering a fixed rate bond cash ISA deal.
Please note that this information is based on current law and practice which may change at any time.
Top Ten Tips for Using Fixed Rate Bonds in 2016
1. Consider all options – from instant access to fixed rate bonds to Cash ISAs - All have advantages and disadvantages when trying to build a nest egg for the future.
2. Check the market – shop around to find the right savings plan for you. Interest rates are changing all the time and deals on fixed rate bonds come and go on a regular basis.
3. Make sure you find a bond that works for you. The choice of bond is dependent on the amount of money you intend to deposit, the fixed rate of the bond, and the length of the fixed rate period. Whether you want the bond to be operated on an online account basis, postal basis or telephone basis. These should all be taken into consideration before making your choice. Read the savings provider terms and conditions carefully.
4. Read the fine print – determine when the provider is likely to let you access your money, how much notice is required, and if there are any penalties for requesting access before the bond matures.
5. Some fixed rate bond deals require you to have the interest paid into a current account - check the small print.
6. Check the small print on how interest is paid. If monthly or annually this will be need to be declared if you submit a tax return. If interest is paid on maturity this may be useful for tax planning purposes.
7. Many fixed rate bond deals require you to have internet access. Some are offered on a postal or branch basis - check the small print.
8. Check that your money is covered by the Financial Services Compensation Scheme – they will guarantee £75,000 of savings against institutional failure. Most UK banks should have this cover, but Irish banks that do not have a UK arm may not be covered by the FSCS.
9. Providers will write to you when your account matures; if you do not respond the provider will often put your savings into a low or no interest holding account until you provide instructions on what you want to do with the money. It is therefore important to diarise the maturity of your bond and have in mind what you want to do with the money.
10. If you are not a tax payer many providers will pay interest gross on submission of the relevant HMRC tax form.