For security and peace of mind, it’s handy to have savings. But it can be hard to decide where to put your money. Interest on fixed-rate savings accounts has diminished in the current climate. Still, with banks encouraging us to invest to save inter-bank lending, some long-term bonds are still offering above 1.5%.
So, the question is – are they worth it? Read on to get the lowdown on fixed-rate bonds. Find the best deals around, risks and benefits to these savings investments, and why you should or shouldn’t invest.
- Fixed-rate savings bonds explained
- Risks and benefits
- What to watch out for
- Read the small print
- Is your money safe?
- Best long-term bonds
- Best short-term bonds
- Should you invest?
- Fixed-rate bond tips
Savings bonds with a fixed rate offer a certain level of interest for a period of time. Essentially, you’re lending the bank your money for a set amount of time whilst earning interest from them. Your money is safe up to £85,000.
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 accept that you can’t easily access your money – unless you’re willing to lose interest.
Interest is added to the bond or paid into a separate account, and can pay out monthly or annually.
Another important thing to think about is the amount of money you’re investing. Most bonds have a minimum and maximum investment amount, ranging from £100 to £10 million depending on the fixed duration.
As with anything, there are advantages and disadvantages to fixed-rate bonds. As it concerns your hard-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 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.
And there’s always the option to open another fixed-rate bond if you have more money to invest, and earn further money at better interest rates.
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.
And 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.
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.
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 or 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 assume all the interest is yours to keep! It’s taxed, so do figure out what you’ll actually get back. For Basic Rate taxpayers, you can earn up to £1000 a year in interest before it’s taxed. Additional rate payers pay interest tax after £500.
Learn more about taxes on savings and investments at GOV.UK – there are exemptions to paying tax on interest!
Where does the interest go?
Make sure you’re fully aware of where the interest goes. 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 monthly interest payments 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 is paid.
Make sure you read it! It’s your money, so make sure you know what’s happening with it.
One of our readers has 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!
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 with different banks.
But 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.
Furthermore, the main aim of the FSCS is to cover against financial loss. This 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 a guarantee from the FSCS itself. But they usually aim to get you your money back within seven to 15 days, so it shouldn’t be too long.
Ireland has its own scheme, called the Deposit Guarantee Scheme (DPS), which at the time of writing covers you up to €100,000. Read more about the Irish scheme here.
Allied Irish Bank customers are still protected by the UK’s FSCS scheme though, as that bank has branches in the UK. As always, check the fine print with your particular bank!
Some of the best rates available are with five-year bonds. Be aware, we think fixing for such a long time in the current climate is a big risk – the base rate is at a mere 0.75% but could move up any time. So, fixing for five years could leave you stuck with an uncompetitive rate for a long time when base rate rises, but maybe not.
As a result, the risk still applies for three-year bonds, but to a lesser extent. But savings and investments can never be predicted 100%. Do your research and pick the best way for your own risk comfort level.
Returns per year for length of deposit
- One year: Paragon, 1.41%.
- Two years: Paragon, 1.5%.
- Three years: Paragon, 1.6%.
- Four years: Union Bank of India UK, 1.75%.
- Five years: Paragon, 1.75%.
It’s interesting to note that, clearly, the longer you can leave your money in a fixed-rate bond, the better. Yet, the increases are quite small. Assuming you put £50,000 aside for a year, a 1.41% rate of return would get you £705. Five years, at 1.75%, would be £875 a year. So that’s only an extra £170 a year for having to leave it sitting there all that time, or an extra £850 total. Note that this doesn’t take into account any tax paid on your savings.
That said, if you know you won’t need the money for a long time and want it building up as much as possible, you may as well go for the longer time period and get that better rate.
The rates are always changing. So, shop around and see what the best deal is right now for your desired length of deposit!
- You’re willing to lock your money away and not see it for a while.
- You want an account that clearly shows what you’ll earn in interest, year on year.
- 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.
- You’re a parent and want to set up a nest egg for when your child comes of age. Note that a Junior ISA may be a better option depending on your circumstances.
- You aren’t disciplined to keep your money untouched or you think you’ll need it before the bond’s term is up.
- You don’t have a separate sum of money quickly available for emergencies, such as job loss or bereavement.
- It’s better for you to have a savings account you can add to on a regular basis to build up savings.
- You’ll be investing more than £85,000 and want it all in one place – it won’t be protected by the FSCS.
Interest rates are all over the place at the moment. 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. Hopefully, interest rates will be higher and more profitable.
In conclusion, 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.