MoneyMagpie

Aug 05

Fixed-rate savings bonds

For security and peace of mind, it’s handy to have savings – but not all of us know what the best accounts are and who is best to invest with. Interest on fixed-rate savings accounts has diminished in the current climate but with banks encouraging us to invest to save inter-bank lending, some long-term bonds are still offering above 2.5%.

So, the question is – are they worth it? Read on to get the lowdown on fixed-rate bonds – the best deals around, risks and benefits to these savings investments, and why you should or shouldn’t invest.

Fixed-rate savings bonds explained

Fixed-rate savings bonds offer a fixed-rate of interest for the period of time in which the account is set up for. Essentially, you’re lending the bank your money for a set amount of time whilst earning interest from them and feeling safe in the knowledge that your money is tied up and you will get it back.

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Bonds can be set up for short time periods of six months and a year, two, three or four years or a long-term period of five years. This is one of the most important decisions to make when taking out a bond, as most accounts will not let you withdraw money for the duration of the bond.

So you need to be comfortable with the fact that once your money is tied up, you’ll have no access to it – unless you’re willing to lose interest.

Interest made on the account will either be added to the bond or paid into a separate account and can be paid monthly or annually.

Another important thing to think about is the amount of money you are investing. Most bonds have a minimum and maximum investment amount, ranging from £100 to £10 million depending on the fixed duration.

Risks and benefits

As with anything, there are advantages and disadvantages to fixed-rate bonds and as it concerns your well-earned money, it’s important to consider your investments very carefully.

Higher interest rates – generally, fixed-rate bonds will offer you a higher interest rate than instant-access savings accounts, meaning you’re rewarded for locking your money away.

The interest rate is fixed – the interest rate offered at the start of the bond will not change for the duration of the bond. This is good news if interest rates fall. However, if rates increase, you’ll still earn the same interest that was agreed when the bond was taken out and will miss out on better interest offers.

There’s always the option to open another fixed-rate bond if you have more money to invest, however, and earn further money at better interest rates.

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No withdrawals – the majority of bonds will not allow access to the money once it’s been tied up (except in extreme circumstances, such as the death of the account holder, for instance). If you open one of the few bonds that do allow withdrawals, you’ll almost certainly incur a charge and also sacrifice interest on your savings.

Even if you plan to withdraw some money and then put it back in again with a bond that allows additional deposits, you’ll still lose interest as it’s calculated daily.

Choosing a bond that doesn’t allow withdrawals is probably a better option, as to take money out defeats the object of having such a savings account.

Of course, we never know when emergencies may crop up and force us to dip into our savings, but if you think you may need the money you’ve invested, an easy-access savings account might be a better option.

the moneymagpie savings accounts comparison tool

Great for teens – young people who have savings and don’t need to spend them can benefit greatly from fixed-rate bonds. Most accounts have minimum age requirements of 18, but we’ve got one below that’s available to those 16 and over.

What to watch out for

There are important decisions to make when thinking about investing and there are also certain things you need to watch out for.

Potentially higher interest rates longer fixed-rate bonds, those for a term of four years of more, offer more attractive interest rates than bonds set for just a couple of years. However if you’re stuck in a bond for five years, you could be running the risk of losing out on earning more interest as rates go up, which is quite likely given the current financial climate.

See below for the best bonds around at the moment.

Interest is taxed – don’t make the mistake of thinking the whole 2% or 3% interest is yours! You’ll be taxed on your interest so make yourself aware of the net totals you’ll receive.

Learn more about taxes on savings and investments from GOV.UK – there are exemptions to paying tax on interest!

Where the does the interest go? – make sure you’re fully aware of where the interest on your bond is paid. Some savings bonds will add the interest onto the bond but most will pay it into a separate account held with the same bank or, if you choose, a different one.

Although choosing to have your interest paid monthly ensures you earn regularly from your savings, it also means the amount of interest you receive will be lower compared to annual interest. When applying for a bond, make sure you take a good look at how the interest that is paid.thinking

The small print – make sure you read it! It’s your money, so make sure you know what’s happening with it.

One of our readers recently warned us of a bond from ICICI. It automatically renews on maturity and although the website specifies that customers will be made aware of new interest rates, our reader was unaware of the automatic renewal and only managed to get her interest back – not the money she invested.

Most fixed-rate savings providers will automatically renew your account at the time of maturity, however they should write to you beforehand to warn you. To talk about your options at this time, don’t be shy of giving them a call.  If you do want to get your hands on your money at maturity, don’t forget to take it out of the account at the end of the term to avoid locking your money away for the same amount of time again!

Is your money protected? all of the bonds below are protected as part of the Financial Services Compensation Scheme (FSCS) but this only guarantees the first £85,000 of any savings account.

For that reason, don’t put more than £85,000 into one account at any one time. You usually won’t be able to take out two of the same bond with the same bank or building society so it may mean spreading your money around into two or more bonds.

If you do your research, you’ll be able to get the same interest on both accounts – it’ll just mean some rules will be slightly different and you’ll need to keep an eye on more than one bond.

BUT – if the bank or building society goes bust, the Financial Services Authority (FSA) will take over your bond and you will only be able to claim compensation once the fixed term has ended. Although you will have agreed to this term with the bank at the start of the bond, you won’t earn interest from the FSA.

Furthermore, the main aim of the FSCS is to cover your financial loss which means that in the time it takes them to process your claim, you won’t earn any interest. The fact that the bank ‘guarantees’ interest at a certain rate is not carried on by the FSCS.

Claims against banks and building societies aim to be resolved within three months of the receipt of a Claim Application Form, or within three months of the company being declared default.

Irish banks – since January 2009, Irish banks are no longer covered under the UK’s Financial Services Compensation Scheme. Therefore if you invest with one and they fail, you must rely on the Irish government to get your money back. The Irish banking crisis of the last five years or so means it’s worth steering clear for now.

Best long-term bonds

Some of the best rates available are with five-year bonds such as the Secure Trust Bank 5-Year Fixed Rate Bond at 3.11%. But we think fixing for such a long time in the current climate is a big risk – with the base rate at an all-time low of 0.5% and not looking like moving any time soon, fixing for five years could leave you stuck with an uncompetitive rate for a long time when base rate rises.

The risk still applies for three-year bonds, but to a lesser extent

Saga Fixed-rate Savings Account – three years at 2.55% AER

  • Ages 50 and over
  • Minimum investment amount: £1
  • Maximum investment amount: £10 million
  • No withdrawals
  • No additional deposits once issue closes
  • There will be a charge equivalent to 90 days’ gross interest for closing the account early
  • Interest can be paid monthly or annually
  • Choose between internet only or telephone/postal only access
  • FSCS protected

Halifax Fixed Online Saver – three years at 2.25% AER

  • Online account
  • Aged 16 and over
  • Minimum investment amount: £500
  • No maximum
  • No withdrawals
  • No additional deposits
  • Early closure is permitted but you do lose interest
  • Interest can be paid monthly or annually
  • View balances and statements online
  • FSCS protected

Best short-term bonds

Vanquis two-year High-Yield Bond – two years at up to 1.86% AER

  • Online account
  • Ages 18 and over
  • Minimum investment amount: £1,000
  • Maximum: £250,000
  • No withdrawals
  • No additional deposits
  • No early closure
  • Interest can be paid monthly or annually
  • View balances and statements online
  • FSCS protected

Saga – three years at 2.55% AER

  • Ages 50 and over
  • Minimum investment amount: £1
  • Maximum investment amount: £10 million
  • No withdrawals
  • No additional deposits once issue closes
  • There will be a charge equivalent to 90 days gross interest for closing the account early
  • Interest can be paid monthly or annually
  • Choose between internet only or telephone/postal only access
  • FSCS protected

Aldermore – pays 2% on its two-year bond.

  • Minimum investment amount for interest paid annually: £1,000
  • Maximum investment: £1 million
  • Aged 18 or over
  • No withdrawals or additional deposits allowed
  • Manage online, by phone or by post
  • No early closure (although customers are encouraged to call in the event of ‘hardship’)
  • FSCS protected

Should you invest?

Yes, if:

  • You’re willing to lock your money away and not see it for a while
  • You want an account that you will be able to work out what your savings will earn you in interest
  • You’ll shop around for the best deal at the time, but not agonise over whether you’ll get a better deal in a month or two
  • You’re a teenager – lock your money away and watch it grow until you need it

No, if:

  • You aren’t disciplined to keep your money untouched or you think you’ll need it before the bond’s term is up
  • You want a savings account you can add to on a regular basis over time to build up savings
  • You want to invest more than £85,000 and want it all in one place – it won’t be protected by the FSCS

Fixed-rate bond tips

Interest rates are all over the place at the moment and for that reason, you may be better off investing in short-term bonds rather than long term. Once your initial two-year bond matures, shop around for your next investment when, hopefully, interest rates will be higher and more profitable.

If locking your money away sounds daunting to you and you’d rather be able to use it when you want to, a simple flexible savings account may be the answer.

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WHAT DO YOU THINK?

2 thoughts on Fixed-rate savings bonds

  1. A lot of your information above is woefullly out of date: FSCS cover has been increased to £85000; ICICI UK only offer 6-month and 12-month fixed rate bonds at miserly rates: they are no longer competitive.

    Reply
  2. “One of our readers recently warned us about the ICICI bond. It automatically renews on maturity and although the website specifies that customers will be made aware of new interest rates, our reader was unaware of the automatic renewal and only managed to get her interest back – not the money she invested.”

    ICICI not only emailed me two or three times, well in advance, but also phoned me to warn me of the maturing date on my fixed rate saving with them, and have responded exactly to the decisions I gave them (partial withdrawal and partial reinvestment). I would recommend them for such service.

    Reply

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