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Saving: fixed-rate accounts

Chiara Cavaglieri 18th Jul 2013 9 Comments

Reading Time: 6 minutes

Locking your money away in a fixed-rate accounts is a good thing to do if you’re looking for a guaranteed rate of return – and with some banks now offering more than 2.5% AER for four to five-year terms,  it may be a wise time to consider this kind of investment. It is worth bearing in mind, however, whether you really want to lock your money away for such a long time. Read on for our simple guide to savings bonds as well as checking out the latest fixed-rate deals.

What are savings bonds?

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?

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.

Can I take money out?

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.

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 do you need to watch out for?

The small details

Make sure you understand the exact terms of the account. Never be too embarrassed 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.fixed-rate accounts

Is it safe?

As with all savings accounts, there’s a certain element of risk involved. 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 £85,000 in one savings account. That’s because the first £85,000 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.

The benefits

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. However…

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.
  • You’re looking for a long-term investment (for 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 best long-term fixed-rate savings bonds:

As a word of caution, at the moment the top rates are generally only with very long-term bonds (five years) and this can be a risky move with interest rates expected to pick up at some point over the next few years.

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, 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. Having said that, rates on short-term bonds aren’t particularly eye-catching so at least you’ll be earning a comparatively decent rate in the meantime.

  • Secure Trust Bank pays 3.11% AER on its five-year fixed-rate bond. There’s a minimum deposit of £1,000 and this is fully FSCS protected.
  • The Halifax Fixed Online Saver pays 2.35% AER on its five-year fixed-rate bond and a generous 2.1% on its two-year account. The minimum deposit is £500. Withdrawals are not permitted and no additional deposits can be made after opening the account.

The best short-term, fixed-rate savings bonds (with a fixed-rate period of 24 months or less):

  • Vanquis is a decent one, with its one-year High Yield bond offering 1.66% AER, with a £1,000 minimum deposit with no early access.
  • Aldermore’s two-year fixed-rate savings account pays a fairly good 2% AER, with a minimum £1,000 deposit and maximum £250,000. No additional deposits or early withdrawals are allowed.
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13 years ago

Post Office bond is a good one. Also Anglo Irish Bank are offering some high interest savings.

13 years ago

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.

cross trainer
cross trainer
13 years ago

Really great post, enjoyed reading it. Thanks,

Adeni Jalal
Adeni Jalal
14 years ago

Having been just looking at related blog content intended for our project research and My partner and i happened to stumble on yours. Many thanks for the valuable information!

14 years ago

ICICI Fixed Rate savings Account I had 7,000 gbp in ICICI’s fixed rate saver. I called a week before to tell them I wanted to take it all out. They said I had it on auto-renewal (must have been in the small print) so I explained I wanted it all out. They said “no problem, once it matures you can log in and remove it all.” Well, upon maturity I logged in and could only get the 400 interest out and not my 7,000. I am now waiting for customer complaints to listen to the conversation which was recorded luckily… Read more »

14 years ago

The point is that your money is at higher risk if you invest with an Irish bank. The country is near to bankrupt, & it is not ethical or responsible of the PO to continue to profit from such insecure sources. It does not much matter what the interest rate is until it fully costs in the risk of the investment-but nothing less than 10% would get my money.

14 years ago

You should look into the stability of the bank before investing anything, The Irish economy is in worst condition than here in the Uk as they have a huge deficit of people with negative equity on there properties, All the Big Irish banks have been downgraded by standards and poor and now have there backs against the wall, The Irish giverment have guaranteed to pay all savers but, in truth this can not happen as Ireland does’nt have the money to do this, much like Iceland..! Also be aware that the Uk Post office savings bond is run by the… Read more »

14 years ago

Post Office bond is a good one. Also Anglo Irish Bank are offering some high interest savings.

15 years ago

Also West Bromwich Building Society offer a better deal with a monthly offerwith a Fixed rate bond paying (4.27% AER) 4.30% gross per annum to 30/09/2010. A monthly income option (4.27% AER – 4.22% gross monthly) is also available for balances of £50,000 or over

Jasmine Birtles

Your money-making expert. Financial journalist, TV and radio personality.

Jasmine Birtles

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