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Saving: Fixed-Rate Accounts

Bonds - no, not that kind

What are savings bonds?
What do you need to watch out for?
The benefits and drawbacks

What are they?

Fixed-rate savings bonds (also known as term accounts, or simply fixed-rate savings accounts) are in many ways similar to other types of savings account.

The main difference is that with savings bonds, you agree to tie your money up for a certain amount of time, generally in return for higher-than-average interest rates.

How long does the fixed-rate period last?

A bond can be short-term, lasting between six months and one year. Alternatively, it can be longer-term, lasting for between one and five years.

Can I add money during the fixed-rate term?

Once you’ve set up the account, you shouldn't take any of the money out until the end of the bond period.

If you need the money in an emergency you may be able to get at it - but you'll have to pay an interest penalty.

A few savings bonds will allow you to add money during the term, but the majority will only allow you to put money in at the very start.

How is the interest paid?

While you have the money invested you can usually choose how to receive the interest - either monthly or annually. With some savings bonds you can also choose - at the end of the term - whether to take the money out or to re-invest it.

How much money do I need to put in?

It depends. Minimum savings bond contributions can range from a mere £1 to £10,000 or even more. There may also be a maximum amount that you're allowed to put in.

How do I put money in?

The same way you put money into other types of savings accounts - either online, by post or over the counter.

Just click on any of the links below to take you to the best fixed-rate savings accounts we've found.

How to choose

When looking at different accounts, you'll generally be concerned with the AER (Annual Equivalent Rate). This is the amount of interest your money will earn in a savings account if you leave it alone for one year.

If your interest is paid monthly, the Gross rate (the flat rate of interest) will usually be less than the AER because it doesn't take into account the interest being paid on the interest - the 'compound interest'.

Always compare like for like. So compare the Gross rate of various accounts, or the AER - but not a combination of the two!

What to watch out for...

The small details

Make sure you understand the exact terms of the account. Never be too embarassed to ask questions - it's your money and you need to be crystal clear about what's happening to it.

For example, find out whether you can withdraw money during the term and whether additional amounts of money can be added.

Interest being paid into a different account

There are some savings bonds which offer an attractive rate, but pay any interest into a separate account. This means you can't earn interest on the interest you make - so check whether this is the case before you open any account.

Is it safe?

As with all savings accounts, there is a certain element of risk involved. This has been dramatically demonstrated in recent weeks, with the credit crisis prompting the collapse of several banks worldwide.

One way to minimise the risk to your savings is to invest in government-owned institutions like Northern Rock and National Savings & Investments. Government bonds (Gilts) are also very safe.

The interest rates are by no means the best around - but having an account with one of these institutions may give you peace of mind.

Get more tips and advice in our golden rules to safer savings.

The main concern for most people is that the bank or building society will go bust and they'll lose their savings.

This potential problem is fairly easily solved: Never put more than £50,000 in one savings account.

The first £50,000 of any money in a UK-regulated bank or building society is covered by the Financial Services Compensation Scheme, so if you have less than that amount, your money will be completely safe.

Benefits and drawbacks

You get higher rates: Generally speaking, a savings bond will give you more interest than an instant access account. However, often a long-term bond of three years or more will have a less attractive rate.

This is because the risk to the bank or building society is higher with such a long bond. A bank doesn't want to be stuck paying a high interest rate (the Bank of England Base Rate may drop significantly during the period of the bond) so they tend to hedge their bets with longer bond periods.

The rate is fixed: Banks will often drop their rates without warning, so with flexible (variable-rate) instant access accounts it's extremely important to keep an eye on them.

However, with a savings bond you can rest assured that the interest rate will stay the same for the duration of the bond. If rates fall, you'll benefit from the fixed-rate agreement.

but...

The rate is fixed: As you can see, this can be both a benefit and a drawback. Interest rates could rise during the bond period, meaning you'll miss out on any higher rates on offer during that period.

However, there's nothing to stop you opening another account if you have enough money.

Your money is tied up: Your money will be tied up, so in an emergency it could be difficult to access it.

It's a good idea to keep an amount saved as a 'safety net' in a flexible, instant access account purely for emergencies. We recommend you put aside at least three months worth of living costs, to cover yourself if you lose your job or get into financial difficulties.

Should I invest in savings bonds?

Yes if:

You're looking for stability for your savings and you have money that you don't need to touch for the next year.
You aren't very disciplined and want to be unable to touch your money for a set period of time.
You want to know exactly how much your money will be making over the next year or two.

No if:

You're worried that you might need your money sooner rather than later. You could go for short-term fixed rates, but in this circumstance you might just as well go for a good flexible savings account. See here for the latest best deals.
You're looking for a long-term investment (for your retirement, for example). Savings bond returns are generally not high enough for this. However, they can still be useful if you want to put your money into more secure vehicles as you get close to retirement.

Best buys

The current best fixed-rate savings bonds (with a fixed-rate period of 12 months or less) are:

ICICI Bank UK 'HiSAVE Fixed Rate' 12 Month bond at 5.10% AER, with £1000 minimum deposit and no early acess. Note that this rate is without early access.
Anglo Irish Bank Fixed Rate 1 Year Bond at 5.00% AER, with a £500 minimum deposit.
For a short term rate Chelsea BS is offering the best rate with its 6 month Short Term Winter Bond which has a rate of 4.55% AER until 1 June 2009. Minimum deposit is £1,000.